Accounting Revision Book latest edition 2017-2018

REVISION BOOK

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PREFACE

As I have faced the same struggle that every aspiring Chartered Accountancy student goes through, I am very ecstatic to present this book that could be very beneficial for the budding Chartered Accountants. By designing this book my main objective is to provide an exam preparatory solution in accordance to forthcoming IPCC exam. It is a complete revision book consisting of a planner which will help to strategically revise all the topics in brief in a very short time. It consists of the summary of every chapter, amendments, mock test paper and time management tips. In case, you lose the grip it has articles which can keep you motivated to achieve your goals. It will help you to revise all the topics in the simplest manner. I fervently hope this book will cater my reader’s expectations. I would highly appreciate any suggestions, recommendations and feedback that will help in adding value to my initiative.

Email: [email protected] Mobile: +91 9010535434

ABC Analysis

A

B

C

Attempt Chapter Name Partnership Accounts Financial Statements of NPO Amalgamation Internal Reconstruction Accounting Standards Single Entry System Total Percentage Insurance Claim Hire Purchase Accounts Investment Accounts Cash Flow Statement Average Due Date Total Percentage Self Balancing & Sectional Balancing System Account Current Profit Prior to Incorporation Shares Company Financial statements Accounting in Computerized Environment Total Percentage

May 17 16 8 16 20 16 76

Nov. 16 20 16 16 20 8 80

May Nov. May Nov. May Nov. May Nov. 16 15 15 14 14 13 13 12 16 16 16 16 16 16 16 21 8 6 4 16 4 16 10 5 16 16 12 16 4 16 20 16 28 20 23 24 24 20 16 12 8 4 16 16 8 16 76 66 75 68 76 64 74 54 60% 8 8 6 8 16 5 8 8 8 4 8 6 5

4 4

8 8

8 4 20

4 8 4 29

8 4 28

10 8 12 38

4 8 8 4 24

4 4 8

4 8 4 16

4 8 4 16

8 8 5 6 4 4 31 30 25% 4 4 10 10 4 4 14 22 15%

8 4 4 24

4 6 4 30

5 8 24

8 4 25

8 4 8 20

16 4 20

5 8 -

5 8 16 4 33

4 17

CONTENT TOPIC Summary of Chapters: 1. Insurance Claim

PAGE

1-5

2. Self Balancing & Sectional Balancing System 3. Average Due Date 4. Account Current 5. SingleEntrySystem 6. ProfitPriortoIncorporation 7. Shares 8. HirePurchaseAccounts 9. PartnershipAccounts 10. FinancialStatementsofNPO 11. InvestmentAccounts

6-9 10-12 13-15 16-21 22-23 24-26 27-32 33-38 39-44 45-48

12. CompanyFinancialstatements 13. Amalgamation 14. InternalReconstruction 15. CashFlowStatement 16. AccountingStandards 17. Accounting in Computerised Environment Planner: Revision Planner 1st 91-100 nd Revision2Planner 101-110 rd Revision3Planner 111-120 Mock Test Paper

49-54 55-61 62-63 64-68 69-88 89-90 -

-

SUMMARY

INSURANCE CLAIM

CHAPTER - 1 INSURANCE CLAIM

Marks Allocated on this Topic in Previous 5 Examinations May 17 4

Nov. 16 8

May 16 8

Nov. 15 8

May 15 6

1. Fire, Accident, Theft, Earthquake, etc. can cause

loss of property and as well as loss of business. Such losses cannot be predicted but if occurs may ruin the person completely. The computation of claim under:

2.

a) Loss of Stock Policy and b) Loss of profit (consequential loss) policy. LOSS OF STOCK POLICY

3. Calculate claim for loss of stock 

Stock policy will cover the loss of stock due to fire, accident etc.



Claim calculation: Particulars

Amount

Stock on the date of fire

xxx

Less: Salvage Value

xxx

Loss by fire

xxx



The amount of this loss by fire will be the claim amount. But if average clause is applicable ,then the claim amount will be as reduced by applying the average clause.

"Average clause" under insurance claim



If cost of stock on the date of fire (known as insurable sum) was more than the Insured value (policy value) that means it is case of under insurance and Average clause will be applied and claim amount will be reduced as follows. 1

“To be a winner, all you have to give is all you have.”

INSURANCE CLAIM

Claim=



Insured value Loss suffered × Total cost of stock-Salvage Total cost

Stock will be ascertained if the records are also destroyed If Records are destroyed, then Stock on the date of fire is ascertained by preparing Trading A/c. When percentage (%) gross profit is not given then it is ascertained by preparing trading account of earlier year/years.



Abnormal loss will be dealt with While calculating the G.P. ratio of earlier year, or the cost of stock of this year etc., the Cost/Sale value of Abnormal item (i.e. items which are not valued, purchased, sold at normal prices) should be excluded/ adjusted while preparing Trading A/c. After calculating Stock as above, such abnormal item if was lying in stock should be added at lower of cost or realisable value to get total stock on the date of fire.



Salvage value 

The destroyed goods also may fetch some scrap value, which is known as salvage value. Salvage value reduces the loss for insured because he has realized that much amount and hence is deducted from cost of stock lost.



Sometimes the insurance company may takeover such salvaged goods. In such cases Claim (calculated as usual)

xxx

(+) Salvage value (if taken over by insurance co.)

xxx

Total recoverable from insurance company

xxx

LOSS OF PROFIT POLICY

4. Loss Of Profit (Consequential Loss) Policy

Also known as consequential loss policy. When due to fire or accident the business place is destroyed, the production and sales also suffers. The concern losses the profit which otherwise they could have earned on this sales. Such loss of profit is insured under this policy. 2


INSURANCE CLAIM

5.

Calculation of claim under profit policy Claim Calculated as follows: (1)

In respect of Reduction in Turnover ReductioninturnoverxAdjustedG.P.Rate=

(2)

In respect of increase in cost of working (as explained later) = Total

xxx xxx xxx

Less: Saving in Insured standing charges during the indemnity period Loss amount (Profit lost)

xxx xxx

Claim amount will be calculated after applying average clause to this loss amount. Average Clause

6.



If an amount calculated as (Annual Turnover duly adjusted x G.P. Rate) (known as insurable sum) is higher than the policy amount (sum insured) then it is a case of under insurance and hence, average clause is applicable and the loss amount will be reduced as follows. Sum Insured (PolicyAmount)

Claim Amount = Loss Amount X

(Annual Turnover duly adjusted x G.P.Rate)

7. Reduction in turnover = Standard turnover (-) Actual Turnover during claim

period is known as reduction in Turnover. 8. Standard Turnover: It is turnover of that product in the last 12 months which

corresponds to claim period. It should be adjusted for the new trend. Example – Accident took place on 1.4.2016 and business is disturbed for 3 months. Then standard turnover will be the turnover of 1.4.2015 to 30.6.2015.

9. Annual Turnover: Turnover during 12 months immediately before damage/

accident (Not of previous financial year).

Example – In above case the annual turnover is the turnover for 12 months period of 1.4.2015 to 31.3.2016. 10. G.P. Rate 3


INSURANCE CLAIM



G.P. Rate: =

G.P. Turnover

x 100 ….. of previous financial year duly adjusted for

new trend etc. 

This is used to find out claim on reduction in turnover.

11. G.P. (Gross Profit)

Net Profit

….

+ Insured standing charges = G.P. (Gross Profit)

…. ….

This data is taken from previous financial year accounts. Net profit is before income tax. 12. Standing charges means…

Standing charges mean’s the expenses of fixed nature, which does not change even when production or sale changes. Total standing charges = Insured standing charges + Un-Insured standing charges. 13. Increase in cost (additional cost of working) and how is it allowed

If some additional expenses are incurred to reduce or avoid the reduction in turnover due to damage then such amount can be claimed from Insurance Co. but it will be limited to the lower of the following: (i)

Additional Expenses x

G.P. N.P



Insure Stan ng C arges

G.P.  Uninsured Standing Charges

This amount can be taken of last financial year or of the last 12 months period (i.e. annual turnover). (ii) Reduction in turnover Avoided (i.e. sales which could be made because of this exp.)

X G.P. Rate.

14. Indemnity period: Indemnity period is the period specified in the policy as the

maximum period of interruption for which claim can be made. It is counted from the date of fire. 15. Claim period: Claim is available for the Indemnity period or actual period of

interruption whichever is lower. 4


INSURANCE CLAIM

16. Trend in turnover means: The annual turnover and standard turnover should be

adjusted for any upward or downward trend in turnover. Annual turnover ( ) turnover of last financial year Turnover of last financial year

x100

Trend indicates whether future turnover is expected to be more or less than past period turnover.

5


SELF BALANCING & SECTIONAL BALANCING SYSTEM

CHAPTER

–

2



Nov. 16 -

May 16 4

Nov. 15 4

May 15 -

1. Different ledgers which can be maintained When the number of parties is large, instead of preparing only one ledger, three ledgers can be prepared as follow: General Ledger. Debtors / Customers / Sales / Sold ledger Creditors / Suppliers / Purchase / Bought Ledger 2. Name of control / adjustment a/c & other a/c maintained in a ledger To make each ledger Self-Balancing we open adjustment a/c / Control a/c. & Double entry is completed in each ledger independently. 

In Debtors Ledger: A General Ledger Adjustment a/c & all the individual Debtors a/c. will be maintained.



In Creditors Ledger: A General Ledger Adjustment a/c & all the individual Creditors a/c will be maintained.



In General Ledger: All the accounts other than debtors and creditors maintained like sales a/c, purchase a/c, cash a/c etc. In addition, two control/ adjustment accounts namely Debtors Ledger control a/c. (or total Debtors a/c) and the creditor Ledger control a/c (total creditors a/c)

3. Journal Entries 1. Credit Sale of goods Normal (Regular) Entry Individual Debtors Dr. To Sales A/c

Entry in General Ledger

Entry in Debtors Ledger

Debtors Ledger Adj. A/c Dr.

Individual Debtors Dr.

To Sales A/c

To General Ledger Adj. A/c

2. Collection from debtors Normal (Regular) Entry 6



“Society may predict, but only I can determine my destiny.”


Cash/Bank A/c Dr.

Cash/Bank A/c Dr.

General Ledger Adj. a/c Dr.

To Individual Debtors

To Debtors Ledger Adj. A/c

To Individual Debtors

3. Credit Purchase of goods Normal (Regular) Entry


Entry in Creditors Ledger

Purchase A/c Dr.

Purchase A/c Dr.

General Ledger Adj. a/c Dr.

To Individual Creditor

To Creditors Ledger Adj. A/c

To Individual Creditors

4. Payment to Creditor Normal (Regular) Entry



Individual Creditors Dr.

Creditors Ledger Adj. A/c Dr.

Individual Creditors Dr.

To Cash/ Bank A/c

To Cash/Bank A/c

To General Ledger Adj. a/c

4. List the items which do not come in control/ adjustment accounts Following items through may be related to debtors will not come in control a/c because their entries don’t affect individual debtors account. Entries have been given there under. Transaction

Normal (Regular) Entry

(a)C ash Sale of goods

Cash/ Bank A/c D r. To Sales A/c

Control account effect No effect on Debtors or Creditors hence no effect on Control/Adjustment A/c

(b) Provision for Bad Bad debt/ Discount A/c Dr. debts/Provision for discount on To Provision for Bad debt or debtors.

----- do -----

Provision for Discount A/c

(c) Bad debts recovered

Cash/Bank A/c Dr.

(d) Bills receivable honoured

Cash/Bank A/c Dr.

----- do -----

To Bad debt recovered A/c ----- do -----

To Bills Receivable A/c (e) Bills receivable discounted

Bank A/c Dr.

----- do -----

Discount A/c Dr. To Bills Receivable A/c (f)

Bills

receivable

sent

for

collection

Bills for Collection A/c Dr.

----- do -----

To Bills Receivable A/c

(g) Cash Purchases

Purchase A/c Dr. To Cash/Bank A/c

(h) Provision for Discount on

Provision for Discount on

creditors

Creditor A/c Dr.

(i) Bills payable honoured

Bills Payable A/c Dr.

----- do --------- do -----

To Discount A/c ----- do -----

To Cash/ Bank A/c 7



5. Transactions involving debtor & creditor both (i) Transfer from debtors (a debi t balance) to Creditors ledger or transfer from creditors ledger (a credit balance) to Debtors ledger or simply transfer is mentioned in question then entry is: Creditors A/c Dr.

-

To Debtors A/c

-

Debtors A’s debit balance transferred to Creditor ‘B’

Normal (Regular) Entry Individual Creditors A/c Dr.

Entry in General Ledger Creditors Ledger Adj. A/c Dr.

To Individual Debtors A/c

To Debtors Ledger Adj. A/c



G L A A/c (in debtors ledger) Dr.

Individual Creditors A/c Dr.

To Individual Debtors A/c

To G L A A/c (in creditors ledger)

(ii) But if Transfer is from debtors (having Credit balance) to Creditors or from Creditor (having debit balance) to debtors then the entry will be: Debtor A/c Dr.

-

To Creditors A/c

-

Debtors A’s credit balance transferred to Creditor ‘B’



Individual Debtors A/c Dr.


To Individual Creditors A/c




Individual Debtors A/c Dr.

GLA A/c (in creditors ledger) Dr.

To G L A A/c (in debtors ledger)

To Individual Creditors A/c

(iii) In case an endorsed Bills receivable is dishonored then entry will be: Debtors A/c Dr.

–

To Creditors A/c

–

An endorsed Bills receivable is dishonored. It was received from Debtor ‘A’ and endorsed to Creditor ‘B’.



Individual Debtors (A) A/c Dr.


To Individual Creditors (B) A/c


8





Individual Debtors (A) A/c Dr.

G L A A/c (in creditors ledger) Dr.

To G L A A/c (in debtors ledger)

To Individual Creditors (B) A/c

6. What is Sectional Balancing? In Sectional balancing, as compared to self-Balancing the only difference is that in Debtors Ledger & Creditors ledger, the General ledger adjustment a/c is not prepared & hence double entry is completed only in General ledger but not in Debtors & Creditors Ledger. Thus only a section of the ledgers is balanced hence the name sectional balancing. 7. Distinguish between Self and Sectional Balancing System. Self-Balancing 1. 2.

Sectional Balancing

Each of the three ledger Only General ledger includes control a/c includes control a/c. Total 4 control a/cs are Total 2 control a/cs are made made

3. Double entry is completed Double entry is completed only in General ledger in each of the three ledgers Trial balance from each of Trial balance can only be prepared from General the 3 ledger can be prepared ledger & tallied. From Debtors & creditors list 4. & tallied independently.

can be prepared & total of it be cross checked with the balance of respective control a/c in General ledger.

9


AVERAGE DUE DATE

CHAPTER - 3 AVERAGE DUE DATE


Nov. 16 4

May 16 4

Nov. 15 12

May 15 4

1. Due date is a date on which a transaction (like sale, purchase, loan instalment) or bills/promissory notes etc. falls due for settlement (i.e. due for receipt or payment) is known as due date. 2. Average due date is the weighted average of given any number of dates with equal or unequal amounts. 3. Calculation of Due Date 

Date of Bill = Date of Drawing Bill = Date of Signing Bill Date of Sight = Date of Presentation = Date of Acceptance



3 days of grace is added only in case of Bills of Exchange or Promissory Note, but not in case of general transactions.

4. Effect of holidays on due dates (i.e. what to do if the due date falls on holiday) Due date relates to

Holiday is

Date to be considered as due date

1. Bills of exchange/ promissory a. Public holiday

Preceding (previous) working day

notes

Subsequent (next) working day

b. Emergency holiday (unscheduled/sudden)

2.

Other

cases

like,

sale,

purchase, etc.

a. Public holiday

Subsequent (next) working day

b. Emergency holiday

- do -

5. Process of calculating average due date a) If due date given

10

Due Date

Amount

Days from Base Date

Product

1

2

3

=2x3

“The past is over... forget it. The future holds hope... reach for it.”

AVERAGE DUE DATE

b) If due date not given Date of Bill

Term

Due Date

Amount

Days from Base Date

Product

1

2

3

4

5

=4x5

c) If due date not given [Date of bill & Date of acceptance Given] Date of

Date of

Bill

Acceptance

1

2

Term

Due Date

3

Amount

4

Average Due Date = Base Date +

Days from Base

5

Date 6

Product 7=5x6

Sum of Product Sum of Amount

Note: Select any one date as the base date preferably the earliest date, although any date even other than due date can be taken. (Answer will be same irrespective of the base date selected) 6. Calculation of average due date when debit and credit both balances are there. while calculating sum of amount the same will get netted and similarly their products will also be debit & credit and hence will also get netted. Average Due Date = Base Date + (Net) Sum of Product (Net) Sum of Amount 7. Simple calculation of average due date Calculation of Average Due Date where amount is lent in Single Instalment & repayment is made in number of equal instalments, can be made as follows. Amount of various instalments must be same. Sum of days (months or years) from the date of

Average Due Date = Date of lending +

lending to the date of repayment of each instalment Number of instalments

Note: If time gap between instalments is given in years then use years, if given in months, use months otherwise use days.

11


AVERAGE DUE DATE

8. Interest/rebate calculated with average due date 

If paid after the 'Average due date' - liable to pay interest for the period delay



If the amount is paid before the 'Average due date' - get rebate (discount) for the early payment.

9. No interest charged/taken if settlement is done on average due date 10. Average due date is used for calculating interest on drawings It is the average date (equivalent date) of total drawings made hence interest on total amount of drawing is calculated from the average due date to the year-end date. 11. February has 28 days or 29 days? 29 Days = Year / 4 [If it is perfectly divided] 28 Days = Year / 4 [If result in fraction]

12


ACCOUNT CURRENT

–

CHAPTER

4

ACCOUNT CURRENT

Marks Allocated on this Topic in Previous 5 Examinations

May 17 8

Nov. 16 -

May 16 8

Nov. 15 -

May 15 -

1. Account Current is a statement rendered by one party to other giving details of

transactions with that party together with the details of interest calculation. 2. It is prepared for a particular period. 3. Alternatives for presenting account current

It can be prepared in the following 3 ways. 

Account current byproducts of each transaction method (it is most common).



Account current byproducts of balance method. (It is followed by Banks etc.)

4. Preparation of Account current by product of transaction method.

Account Current By Product of Transaction Method For the Period ……….. Date

Particulars

Rs

Due Date

Days

Product

Date

Particulars

Rs

Due Date

Days

Product



Account of that person in our books.



Prepare account as usual by debiting the account whenever that person is receiver and crediting the account whenever that person is giver.



Days are calculated from the due date of each transaction (item) to the period end, in both debit and credit sides.



Day are multiplied with the respective amount to calculate products.



Interest is recoverable on total of product of debit side and is payable on total credit products for one day. Alternatively, interest can be calculated for net products.

13

“When everything feels like an uphill struggle, just think of the view from the top.”

ACCOUNT CURRENT

5. Preparation of Account current by product of Balance method.

Account Current By Product of Balance Method For the Period ………….

Date

Particulars

Dr.

Cr.

Balance Dr/Cr

Amount

Days

Product Debit

Credit



Account of that person in our books.



Prepare account as usual by debiting the account whenever that person is receiver and crediting the account whenever that person is giver.



It is prepared in debit, credit and balance pattern, (Bank Pass book type).



Wherein after every entry, new balance is calculated (transactions get merged and result into new balance each time). Here due date of each transaction must be same as date of transaction otherwise



this format will not work. Days are calculated for each balance (debit or credit) from the date of previous



balance to the date of this balance. 

Day are multiplied with the respective amount of balance to calculate products.



Product will be debit product if balance is debit and it will be credit product if balance is credit. Interest is recoverable on total of debit product and is payable on total of credit



products for one day. Alternatively, interest can be calculated for net products. 6. Any specific period for account current 

No. It is decided mutually by the parties concerned.

7. How are the days counted for calculating products in account current?

In case of

Calculation

Normally Bills

of

exchange 14

from the due date of transaction to the last date of that period the due date should be taken as starting point and not the date of accounting


ACCOUNT CURRENT

Sale-purchase 

Invoice date should be considered.

If credit period is given, then due date should be calculated. Whenever due date is not given the date of transaction itself will be taken as due date for calculation of days.

8. Interest receivable or payable 

On Debit product interest is recoverable.



On credit product interest is payable to them.



Interest is recoverable on debit products for One (1) day and payable on credit products for one (1) day.

9. What if different rates are applicable for interest recoverable and payable? 

If the rate for interest recoverable and interest payable is different than net products are not to be calculated.



Interest will be calculated on debit products at the interest recoverable rate, and on credit products interest will be calculated at payable rate.



In this case account current by-product of balances method will have to be prepared and then apply respective rates to debit products and credit products.

10. What is red ink interest? 

In case the due date falls beyond the end of that period, then no interest is to be given on it upto the period end.



But the negative interest (opposite interest) from the end of period to the due date should be calculated, & written in red ink on the side of transaction so that these Red ink products will be deducted from the other products of that side, OR alternatively to give this effect this product can be written by the same ink but on the Opposite side of that transaction.



Example. Account current is for the period 01.01.2016 to 31.03.2016. Due date of a particular transaction is say 20 thApril, then the red ink days (opposite days/negative days) will be 20 days.

15


ACCOUNT FROM INCOMPLETE RECORDS

CHAPTER: 5 ACCOUNT FROM INCOMPLETE RECORDS

Marks Allocated on this Topic in Previous 5 Examinations May 17

Nov. 16

May 16

Nov. 15

May 15

16

8

8

4

16

1. Single Entry System: There is no defined or prescribed accounting which can be referred as Single entry system. Hence we can say anything short of books of account maintained by double entry system, is commonly known as single entry or incomplete records. 2. Final accounts in case of single entry system. Usually we may encounter following three types of problems 

Statement of Affairs Method



Completed Account Method



Ratio based questions STATEMENT OF AFFAIRS METHOD

3. The capital of the beginning & end of the year is ascertained, by preparing the statement of affairs (i.e. Balance sheet) of the two dates. By making necessary adjustment in the capital account the amount of profit/loss for the year is derived as follows. Combined of all Capital at the end of the year

partners …

Add: Drawings

…

Interest on partner’s drawings

…

Less: Opening capital

…

Addition during the year

…

16

“The size of your success depends on the depth of your desire.”


Interest on capital & salary to partner

…

Balance will be profit/loss after interest & salary

…

Note: Alternatively, this can be done by preparing a capital a/c & recording all this information to get the amount of profit or loss for the year. Capital Account (Combined) Particulars

Amt

Particulars

Amt

To Drawings

…

By Opening balance

…

To Interest on drawings

…

By Interest on capital

…

To Closing balance

…

By Salary to owners

…

(ascertained from closing balance

By Cash/bank (addition)

…

By Net profit (balancing figure)

…

sheet) …

…

COMPLETED ACCOUNT METHOD

4. Completed account method. When the information given is sufficient, we complete all the necessary accounts by double entry method & ascertain the information which is not given by balancing those accounts. Draft an income account Any and every income account can be prepared as follows: Income Account Particulars To

Opening

Outstanding

Amt B/f

Particulars

Amt

… By Opening Advance b/f

…

To Profit & Loss a/c (Income for the year)

… By Cash/Bank a/c … (Received during the year)

… …

To Closing Advance C/f

… By Closing outstanding C/f

…

… (Receivable)

…

… Total

…

(Receivable)

Total

17



Draft an expense account Any and every expenses account can be prepared as follows: Expense Account Particulars To

Opening

Advance

Amt B/f

Particulars

…By

(Prepaid)

Opening

Outstanding

Amt b/f

…

(Payable)

To Cash/Bank a/c

… By Profit & Loss a/c

…

(Paid during the year)

… (Expense for the year)

…

To Closing Outstanding C/f

… By Closing Advance C/f

…

(payable)

… (prepaid)

…

Total

… Total

…

Draft a fixed asset account Fixed Assets A/c Particulars

Amt

Particulars

Amt

To Opening Balance b/f

… By Cash/Bank (Sale)

…

To Cash/Bank a/c (Purchases)

… By P&L a/c (Loss on sale)

…

To P&L a/c (Profit on sale)

… By Depreciation a/c

…

By Balance c/f

…

Total

… Total

…

Draft Debtors account Debtors a/c Particulars To Opening Balance b/f (Receivable)

Amt

Particulars

… By Cash/Bank/ Bill Receivable

Amt …

a/c (Received)

To Sales a/c (Credit sale)

… By Bad debt/Discount allowed

…

Total

By Balance c/f … Total

…

18



Draft Creditor a/c Creditors A/c Particulars

Amt

To Cash/Bank/Bills Payable

Particulars … By Opening balance b/f (payable)

a/c (Payment)

By Purchases a/ c (Credit purchase)

To Discount received a/c

…

To Balance c/f

…

Total

… Total

Amt … …

…

Draft a Goods/stationery/consumables account Any Goods/stationery/consumables account can be prepared as follows: Goods/stationery/ consumables Account Particulars

Amt

Particulars

Amt

To Opening balance B/f

… By Profit & Loss a/c/I&E a/c

…

(Opening stock)

… (Consumed/Cost of goods sold)

…

To Cash/Bank a/c (cash

… By Closing balance C/f

…

purchase during the year)

… (dosing stock)

…

To Creditors a/c (credit purchase)

…

…

Total

… Total

…

Points To Remember… 

While preparing any such account, record the given data & then by balancing such a/ c missing data is ascertained.



When opening Balance sheet is not given the same should be prepared to ascertain any missing information like opening balance of Capital a/c etc.



Other a/cs. Like assets a/c, loan a/c, goods a/c, cash, Bank a/c, etc. can also be prepared to ascertain missing data if any.

RATIO BASED PROBLEMS

5. Ratio based problems 

Sometimes in addition to certain Opening & closing balances & transactions, some financial ratios are given.

19



A. Profitability Ratios N.P. before Interest and Tax (PBIT) x 100

1 Return

on

Investment

(R.O.I) (Overall profitability ratio)

Capital Employed OR N.P. after Tax (PAT) + Interest x 100 Capital Employed * Note - 1st formula is commonly used.

2

Net Profit Ratio

3

Gross Profit Ratio

N.P. before Interest and Tax (PBIT) x 100 Sales Gross Profit x 100 Sales B. Turnover Ratios

4

Fixed Asset Turnover Ratio

5

Capital Turnover Ratio

6

Current

Asset

Turnover

Ratio

Sales Fixed Assets Sales Capital Employed Sales Capital Assets

Note - In ratio nos. 4, 5 & 6 in place of sales, alternatively cost of sales can also be used. Cost of goods sold or sale Stock

7

Stock (Inventory) Turnover Ratio

Stock = Raw Material + Finished Goods + WIP + Stores & Spares Note: When opening & closing stock is given then we should take average stock for calculation, otherwise closing stock will be considered. 12

.

Stock Turnover Ratio

8

Stock Velocity Ratio

Or Stock . Monthly cost of goods sold/Monthly sales

9 10

20

Debtors Turnover Ratio Debtors Velocity Ratio (in months)

Sales (only credit sale if given) Debtors (including bills receivable) 12 Debtors Turnover Ratio

Or

Debtors Monthly Sale



11 12

Creditors Turnover Ratio Creditors Velocity Ratio (in months)

Purchases (only credit purchase if given) Creditors (including bills payable) 12

Or

Creditors Turnover Ratio

Creditors Monthly Purchases

C. Ratios of Solvency or Ratios showing short term Financial Position/Liquidity ratios

13

14

Current Assets

Current Ratio Acid

Test

Current Liabilities Ratio/Quick

Ratio/Liquidity Ratio

Liquid Asset (i.e. Current Assets Excluding Stock) Quick Liabilities (Current liability Excluding Bank over draft)

D. Ratios showing long term Finan cial Position Long term debts Shareholder’s fund

15

Or

Debt Equity Ratio

Long term debts Long term Fund (i.e. shareholders fund + long term Debt)

16

Fixed Assets Ratio

Fixed Assets Long Term Funds E. Other Ratios

17 18

19

Fixed Charges Cover

Profit before interest & tax (PBIT)

(interest cover ratio)

Interest

Debt Service Coverage

Profit after tax + Interest on term loan + Depreciation

Ratio (DSCR) Return on Equity / shareholders fund (RONW)

Interest + Loan repayment Profit after Interest, Tax & Preference Dividend i.e. PAT Pref. Div Equity shareholders fund (Net worth) Profit after Int, Tax & Pref. Dividend i.e. PAT Pref.

20

Earning per share

Div No. of equity shares

21

21

Price earning ratio (PE ratio)

Market price Earning per share


PROFIT PRIOR TO INCORPORATION

CHAPTER - 6 PROFIT PRIOR TO INCORPORATION


Nov. 16 4

May 16 -

Nov. 15 8

May 15 10

1. Profit prior to incorporation: Profit being of capital nature, should be credited to Capital Reserve A/c or Goodwill A/c. Loss prior to incorporation: Either Debit to Goodwill or Capital Reserve A/c. 2. Profit or Loss post to incorporation: Net Profit or Loss 3. Division Or Expenses Into Pre-Incorporation & Post Incorporation Period Apportionment of expenses & incomes over the two periods will be done as follows: Item

Basis

Sales Ratio 1. Gross Profit Expenses related to sales like discount, bad debts, Sales Ratio 2. commission to salesman, advertising, Freight outward etc. 3.

Time based expenses like Salary, interest, rent etc. are Times Ratio divided Expenses

exclusively

related

to

company

like

Post Incorporation 4. Preliminary Expenses W/off, Directors fees, Interest Period on debenture etc 5. Expenses exclusively of pre-incorporation period like Pre-Incorporation partner’s salary etc. period 6.

Items like Audit fees which is influenced both by time Either on sales basis & turnover.

or on time basis.

7. Other General & Miscellaneous Expenses

22

Either on sales basis or on time basis.

Concentrated thoughts produce desired results.

“

”

PROFIT PRIOR TO INCORPORATION

8.

Items, for which specific details are given in the question, must be apportioned in accordance with that information.

Note: Be careful while calculating time ratio, this being first accounting period, it can be more or less than 12 month.

23

Concentrated thoughts produce desired results.

“

”

SHARES

CHAPTER - 7 SHARES


Nov. 16

May 16

Nov. 15

May 15

-

-

-

-

-

1. Alteration of Share Capital: A company can alter its share capital, If authorized

by

its

articles,

by

an

ordinary resolution in 5 ways: a) Increase

the

authorized

share

capital. b) Consolidate its existing shares into larger denomination. c) Convert fully paid up s hares into stock and reconvert stock into fully paid shares. d) Sub-divide its existing shares into smaller denomination. e) Cancel shares, which have not been taken place up and diminish the amount of the authorized share capital by the number of shares so cancelled. Such cancellation is not deemed as reduction of share capital. 2. Diminution of capital results in decrease of such portion of authorized capital which is issued but remains unsubscribed. No accounting entry required for it. Only disclosure of issued capital in financial statements will change. 3. Reduction of share capital means reduction in respect of that portion of: 

Issued capital which has been subscribed, called up and paid up (capital paid up) or



Issued capital which has been subscribed but not called up (capital not paid up).

A company can reduce its share capital in any manner and in particular: 

by reducing or extinguishing the liability of members in respect of capital not paid up.

24

The path to success is to take massive determined action.

“

”

SHARES



If Rs. 50 are paid up, on a share of Rs. 100 and the company extinguishes the liability of the remaining Rs. 50, then it will amount to reduction in capital.



by paying off or returning paid-up capital not wanted for the purposes of the company.



by paying off a part of the paid-up capital on the footing that it may be called-up again.

4. A stock may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value. It is a set of shares put together in a bundle. However, no company can make an srcinal issue of stock. 5. Conversion of Se curities: IF authorization by AOA and the provisions of Companies Act 2013, any security may be converted into another type of security as per the terms and conditions specified at the time of issue of the said security. Entries for Conversion Preference share capital/ Debenture capital A/c

Dr.

(the security being converted)

Debenture discount A/c

Dr.

(Excess of face value of new

To E.S capital/ P.S capital/ Debenture capital A/c To Securities Premium A/c

security over agreed price) (the new security being issued)

(Excess of agreed price of new security over face value)

6. Issue of Bonus Shares: 

Bonus issue is also known as capitalization of profits/ reserves.



It is the free distribution of shares to the existing shareholders.



As per Section 63(3) Bonus issue shall not be in lieu of dividend.



Only free reserve & profits can be utilized, Share premium received in cash, Capital buy back reserve & Capital Redemption Reserve can be utilized only for giving fully paid Bonus Shares. Capital reserve realized in cash can be utilized



for bonus issue. Revaluation reserve cannot be utilized. As per section 63(2) Bonus issue allowed if: o

Authorized by articles,

o

Recommended by board & authorized in General meeting.

o

It has not defaulted in payment of interest or principal of fixed deposit or debt securities, payment of statutory dues of employees like PF, Gratuity etc.

25


“

”

SHARES

Partly paid up shares if any are made fully paid up .

o

As per Article 39 of table ‘F’ under schedule I a company can resolve to use free



reserves & Profit & Loss account for: o

Converting partly paid share into fully paid share by bonus or

o

Issuing fully paid bonus shares

to members who would have been entitled thereto, if distributed by way of dividend and in the same proportions. Bonus issue can be in either of the following two types:



I. Conversion of Partly paid shares into fully paid shares (Only free reserves & profits can be utilized) a) Reserves/ Profit appropriated for Bonus P&L A/c./ Gen. Res. A/c./ Div. equalization reserve A/c Dr. To Bonus to Shareholders A/c. b) Final call made/ due FinalCallA/c

Dr.

To Share Capital A/c c) Bonus due is adjusted against final call due Bonus to Shareholders A/c

Dr

To Final Call A/c II. Issue of fully paid Bonus Shares a) Reserves/ Profits appropriated for bonus CRR/ Capital buy back reserve/Share Premium/ P&L/ G.R A/c

Dr

To Bonus to Shareholders A/c b) Bonus shares allotted Bonus to Shareholders A/c

Dr

To Share Capital A/c 

Order In Which Reserve Should Be Used For Bonus 1st- Capital Redemption Reserve/ Capital buy- back reserve, 2nd- Share premium A/c. & 3rd - then only other profits/ reserves.

26


“

”

HIRE PURCHASE ACCOUNTS

CHAPTER - 8 HIRE PURCHASE ACCOUNTS


Nov. 16

May 16

Nov. 15

May 15

4

8

8

-

8

GENERAL POINTS

1. Hire Purchase Sale 

Hire

purchase

arrangement

sale

whereby

is

an

Vendor

delivers possession to the buyer against the price to be paid in installment together with interest. 

The ownership passes to the buyer on payment of last installment. In case of default in payment the vendor has right to repossess the goods.



The vendor has legal right for the installments which has already fallen due before repossession.Buyer is not liable for the installments which has not yet fallen due if he returns the goods.

2. Cash Price: It is the price at which the goods is sold/ bought in the market for immediate payment. 3. Hire purchase price = Cash Price + Interest

4. Calculation When Cash Price & Interest Rate Is Given 



In such cases the interest for every period is calculated by applying the rate of interest to the amount outstanding at the beginning of that period. From this total amount, the installment paid will be deducted. In the next period the interest will be calculated on such balance amount of the cash price.

27

Believe in yourself and you will be unstoppable.

“

”


5. Calculation When Hire Purchase Price & Cash Price Is Given Or Progression Method Or Sum Of Digits Method When Hire Purchase price and Cash price is given, the interest amount will be



the difference between the Hire purchase price and the cash price. This total interest is to be distributed over the total period in the ratio of



amount or No. of installments outstanding at the beginning of each period. It is also called progression method/ sum of digits method.

If Installment Amounts Are Not Equal, Then How Calculation Will Be Made If installments are not of uniform (equal) amounts, then instead of number of



installments, the amount outstanding shall be taken as basis for apportionment of interest.

6. How Cash Price Will Be Calculated (Reverse Calculation) Start with last installment which includes principal amount outstanding and



interest on it for that period. Deduct last period interest from it to get opening balance of this period which



is the closing balance of previous period. Add to this the (last but one) installment to get outstanding which includes principal & interest of that period. Repeat the same process, until you reach to first installment.



ACCOUNTING IN THE BOOKS OF PURCHASER

7. 1st Method – Asset is Shown at Full Cost & Interest is Accounted Every Year 1. In the first year on the purchase of Asset: Asset A/c

Dr. (with the total cash price)

To Hire Vendor’s A/c

2. Down Payment: Dr. (with down payment/ signing amount paid)

Hire Vendor’s A/c

To Bank/ Cash A/c 3. Interest charged at the end of every year: Interest A/c 28

Dr.

(with amount of interest payable for that year)


“

”


To Hire Vendor’s A/c

4. Payment of installment every year: Dr. (with installment plus interest amount paid)

Hire Vendor’s A/c

To Bank/ Cash A/c 5. Depreciation charged at the end of every year: Depreciation A/c Dr.

(Dep. to be charged at the end of every year, at the rate

To Asset A/c/ Depreciation Provision A/c.

& method specified).

2nd METHOD: Interest Suspense A/c Method 1. In the first year at the time of purchase: Asset A/c

Dr.

(with cash price)

Interest suspense A/c

Dr. (with total interest for full period as included in hire purchase price

To Hire Vendor A/c

(with total Hire purchase price)

2. Payment of down Payment: Hire Vendor A/c Dr.

(Payment of down payment)

To Bank/ Cash A/c 3. Interest transferred at the end of every year: Interest A/c Dr. (Amt. of interest for that year transferred) To Interest Suspense A/c 4. Payment of installment every year: Hire Vendor A/c Dr.

(Payment of installment including interest)

To Bank/ Cash A/c 5. Depreciation charged at the end of every year: Depreciation A/c Dr. (Dep. charged calculated at given rate & method specified). To Asset A/c/ Depreciation Provision A/c.

Credit balance of vendor account after deducting debit balance of interest suspense account be shown on the liability side. Final figures every year will be same as in 1st method. Debit balance of Depreciation A/c & Interest A/c will be charged to profit & loss a/c every year in both the above methods.

29


“

”


3rd METHOD: Asset is debited as and when the cash price is paid (Asset Accrual Method) Asset is not recorded at full value immediately on purchase but debited as and when the amount is paid/ due towards cash price/ principal amount. 1. When Down Payment is made: Asset A/c

Dr.

(Actual amount paid on signing the agreement)

To Bank/ Cash A/c 2. On payment of installment every year: Asset A/c

Dr.

(with cash price included in installment)

Interest A/c Dr.

(with interest included in installment)

To Bank/ Cash

(with installment amount)

If installment is due but paid later on then in above entry credit vendor a/c and when payment is made debit vendor a/c and credit cash/ bank a/c. 3. Depreciation (at the end of every year): Depreciation A/c

Dr.

To Asset/ Depreciation Provision A/c. Depreciation is to be charged in the first year on total cash price and not on the amount paid towards Asset. i.e. installment paid. In subsequent year depreciation is to be charged on w.d.v. based on total cash price. It is not a common method and to be followed only if SPECIFICALLY ASKED. This method is not in accordance with provisions of AS-19 hence not to be followed. AS-19 requires asset to be accounted at full cash price the time of purchase, hence REPOSSESSION

1st

2nd

and

–

IN THE BOOKS OF PURCHASER

at

method are as per AS-19.

If buyer fails to pay any due installment then Vendor can reposes the goods because he is still the legal owner effect will be same as above. There can be two situations 1. Full Repossession or 2. Partial Repossession. 30


“

”


Entries For Goods Repossessed – In The Books Of Purchaser 1. When whole of the goods are re-possessed Vendors A/c Dr. To Asset A/c Balance of vendor a/c after providing interest till the date of repossession transferred because it is no more payable. Note: In the Asset a/c Depreciation till the date of Re-possession should be credited. The balance now left in the Asset a/c will be transferred to P&L a/c. 2. When Part of the goods re-possessed at agreed value Vendors A/c Dr.

With agreed Amount

To Asset A/c P & L A/c Dr. To Asset A/c Difference between the WDV of goods repossessed and the agreed amount being loss on repossession Note : Agreed amount may be specified in the question or a rate of depreciation will be specified on the basis of which WDV will be calculated and that will be the agreed value. ACCOUNTING IN THE BOOKS OF VENDOR

(A) Sale Method Entries for sale method (Cash price method) Entries will be as follows: 1. When the articles are sold (on the date of sale) Purchaser’s A/c

Dr.

(with cash price)

Dr.

(Interest due for the period)

To Hire Purchase Sale A/c 2. Purchaser’s A/c To Interest A/c 3. Receipt of Installment: (every year)/ down payment received. Cash/ Bank A/c

Dr.

To Purchaser’s A/c 31


“

”


Note: At year end hire-purchase sale a/c will be transferred to trading a/c and interest to P&L a/c. (B) Interest Suspense A/c Method Entries for Interest Suspense method in the books of Vendor 1. When goods are sold: Dr.

Purchaser’s A/c

To Hire Purchase Sale A/c

(Hire purchase price) (Cash price)

To Interest Suspense A/c

(Total Interest included in H.P. price)

2. Interest for the year is recognized: Interest Suspense A/c Dr. (Interest for the year transferred to interest /P&L A/c) To Interest A/c 3. When Installment/ Down payment is received: Cash/ Bank A/c

Dr.

To Purchaser’s A/c

Note: At the year end Hire Purchase Sale A/c will be transferred to Trading A/c and interest to P&L A/c. REPOSSESSION

–

IN THE BOOKS OF VENDOR

When goods are repossessed: Goods Repossessed A/c

Dr.

(Agreed Value)

To Purchaser’s A/c

(Total amount balance in purchasers account)

1. Any expenses incurred on repairs etc. of this repossessed goods will be debited to goods repossessed A/c. 2. On the sale of such repossession goods this account will be credited with the sale proceeds then the balance will be profit/ loss on sale of repossessed goods and it will be transferred to P&L a/c.

32


“

”

PARTNERSHIP ACCOUNTS

CHAPTER - 9 PARTNERSHIP ACCOUNTS


Nov. 16

May 16

Nov. 15

May 15

16

20

16

16

16

1. What Is Partnership??? 

Partnership

is

a

relationship

between two or more persons to do some commercial activity for mutual benefit, Carried on by all or any of them acting for all. 

Persons who have entered into partnership with one another are called individually

“Partners”

and collectively

“Firm”

and the under which

their business is carried on is called the “Firm Name” 2.

Partners may put in writing the details of their mutually agreed terms and conditions to run and manage the partnership. Such document is known as partnership deed.

3. In the absence of any provision in partnership deed, following provisions of partnership Act are applicable: a. Profit/Loss sharing ratio will be equal, b. No interest is to be allowed on capital, c. No interest is to be charged on drawings, d. 6% per annum interest is to be given on partner's loan, e. No salary is to be paid to any partner, f. Interest and salary, if payable, will be paid only if there is profit unless agreement provides otherwise. Use above, whenever question is silent with regard to this items

33

“The door to success is the one marked PUSH.”


4. Capital Accounts are maintained under two systems (methods), Fluctuating Capital System & Fixed Capital System 

Fluctuating Method In this system only one A/c is maintained for each partner.



Fixed Method For each partner two accounts will be maintained namely Capital a/c and Current a/c.

5. Ratios: Partners can decide mutually any basis or mode of sharing profits and losses, there is no limit to it. So whenever question contains some new basis of sharing, read and interpret it correctly and make calculations according to it. 6. Ratio Of Sacrifice = Old ratio (-) New Ratio. 7. Ratio Of Gain = New Ratio - old Ratio 8. Change in Constitution: If any of the following happens, it is said to be change in the constitution of the firm. Admission of the new partner. 



Retirement/Death of a partner.



Change in the profit sharing ratio.

Whenever there is change in the constitution, the Partners & the Profit sharing Ratio: applicable till the date of change will be known as 'Old Partners' & Old Ratio' & those applicable after the date of change will be known as 'New Partners' & 'New Ratio'. 9. Adjustment When Constitution Changes When there is a change in the constitution basically six under mentioned adjustments will be required. 1. Goodwill adjustment 2. Revaluation of Assets/ Liabilities 3. Transfer of balance of P&L A/c, General reserve or accumulated losses 4. Adjustment of Profit or loss till the date of change 34



5. Joint Life Policy 6. Some old rectification items, etc. All the above items have effect of unaccounted or undivided profit/ loss of the period till the date of change referred here as old profit/loss. 10. Alternative Modes To Make Adjustment For Change In Constitution The adjustment can be made in any of the following ways: The alternative modes to make adjustments for change in constitution ThroughCash

1. Privately No accounting entry in the books of firm

ThroughAccounting

2. Through Firm Cash account will be debited by the amount received from gaining partner. This will be Credited to the account of Sacrificing Partner.

3) Without changing book values/ by single journal entry Gaining partners Dr. To sacrificing partners

(4) By making appropriate changes in the book values of assets/ liabilities/ goodwill/reserves etc. giving second effect to old partner in old ratio

11. Goodwill: Goodwill is the value of reputation of the firm. It is the total of those unidentified benefits which firm enjoys, which help it to earn profit higher than normal profit. It is an intangible asset, hence difficult to value when it is self generated.But following are the methods which can be used for valuation. a. Average profit method b. Super profit method c. Capitalization method a. Average Profit Method Goodwill = Average Profit X number of year's purchase. Number of year of purchase means that many times, Average profit is basically a future maintainable profit. b. Super Profit Method Super profit = Average Profit – Normal Profit Goodwill = Super Profit x No. of Years Purchase

35



c. Capitalization Method Capitalized value = of the business

Profit Earned

x 100

Normal rate of Return

From this capitalized value the amount of the net assets or capital employed (i.e. fixed assets + current asset - Current liabilities) are subtracted the balance is the value of the goodwill. 12. Alternative Treatment Of Goodwill Accounting Following are the different ways in which goodwill may be accounted in case of Admission. 1st Alternative goodwill settled by the Partners privately. (Method I) 2nd Alternative the new partner bring in his share in goodwill in the form of cash. (Method 2) 3rd Alternative Total goodwill of the firm is raised & then written off. (method 3) or Goodwill a/c is not to be raised/direct adjustment to be made in capital a/c (method 3) Net effect of (a) and (b) will be same. 4th Alternative Goodwill to be adjusted without bringing cash. Total goodwill of the firm is to be raised. (method 4) Notes: a) All the above alternatives can be applicable in case of Admission, retirement/ death or change in profit sharing ratio also. b) Alternatives 4 is not in compliance with AS-26 which permits raising of goodwill a/c only when it is purchased. Hence, student should follow it only when specifically required by the question. 13. Inference Of Goodwill 'Inference of Goodwill' is calculation of goodwill when apparently it is not given in the question. This is done only when Capitals are said to be in Profit Sharing ratio and the New Partner brings in cash more than the proportionate Capital. Then the extra amount contributed is inferred as his contribution towards goodwill.

36



14. General Reserve, P&L A/c. Etc. Particulars

Entry

The accumulated profit/loss balance

General Reserve a/ c Dr.

laying in General Reserve, P&L a/c or in

To Old Partners Capital a/ c

other a/c should be transferred to the old

(In their old profit sharing ratio)

partners 15. Revaluation of Assets & Liability: Particulars a) If value of asset is increased (Profit) b) If value of asset is decreased (loss) c) If there is increase in the value of liabilities: (loss) d) If there is decrease in the value of liabilities (profit)

Entry Asset a/ c Dr. To Revaluation a/c Revaluation a/ c Dr. To Assets a/ c Revaluation a/c Dr. To Liability a/c Liability a/ c Dr. To Revaluation a/ c

Note: The balance in Revaluation A/c will be profit (if credit is more) or loss (if debit is more). It will be transferred to the old partners in their old profit sharing ratio 16. Memorandum Revaluation Account It will prepared in the same way as the Revaluation a/c, only difference is that debit/credit to asset/liability a/c's will not be made, whatever is the balance will be the profit or loss to which the old partners are entitled in their old profit sharing ratio. Then whatever was credited to Memorandum Revaluation a/c will be taken on debit side. And whatever was debited to the Memorandum Revaluation a/c as per above will be taken on credit side. This balance is to be transferred to New partners in their new profit sharing ratio. 17. Profit/ Loss Till The Date Of Change In Constitution: The outgoing partners share in the profit is accounted by way of the following entry. It should be proportionate to the No. of days he was partner in relation to whole year. P&L Suspense A/c Dr. (With the amount of his share in the profit) 37



To Outgoing Partners A/c 18. Joint Life Policy: A life insurance policy taken by a firm on the life of its partners is known as joint life policy. It can be either (a) one combined policy on the life of all partners or (b) separate policy on the life of each partner.

Joint Life Policy

P & L A/c Dr. To Bank Account

Death

Claim received

Other JLP A/c Dr. P & L A/c Dr. To Bank Account

Death Other

Claim - Book value (Nil) = Profit = (claim)

Revalued at S.V. Claim received

R.V (=S.V.) - B.V. (nil) = Profit = (S.V.) Claim - Book value = Profit = (claim-S.V)

Revalued at S.V.

R.V (=S.V.) - B.V. (S.V)= Profit = 0

19. In addition to the adjustments discussed above some other adjustments/ entries may come if given in the question. For Example entry for rectification of some old errors, which gives rise to profit/ loss. 20. Section 37 of the Partnership Act if full or part amount of outgoing partner is still balance then

–

He will be entitled to Interest or profit share or nothing as may be

mutually agreed among them. If nothing is agreed then outgoing partner or his representatives have choice to get either of the following till final settlement 

Interest @6% p.a. on the balance amount



Share in profit = Total profit earned x Outstanding amount of outgoing partner Capital of all partners + Balance of outgoing Partner Normally he will select the better of (i) or (ii).

38


FINANCIAL STATEMENT OF NPO

CHAPTER - 10 FINANCIAL STATEMENT OF NOT FOR PROFIT ORGANISATION


Nov. 16

May 16

Nov. 15

May 15

8

16

8

6

4

1. The charitable organizations like trust, clubs, schools, etc., which are non-trading/non-profit organizations

motive

prepares

their

financial statements (final accounts) in the following form: 

Income & Expenditure A/c



Balance sheet.



Generally such organizations also prepares a Receipt & Payment A/c.

2. Income & Exp enditure Account 

like a profit & Loss account.



All the Expenses for that year i.e., related to that year, will be debited to it & All the incomes related to that year will be credited to it.



If the credit side is more, the balance is known as "Surplus" (Profit) & If the debit side is more the balance is known as "Deficit" (Loss)



Follow Accrual system of accounting

Format of Income & Expenditure A/c Income & Expenditure Account For the year ending on 31 st March, 2016 Dr.

Cr. Expenditure

Rs.

Income

Rs.

To Rent A/c

--

By Subscription A/c

--

To Match Expenses A/c

--

By General Donations A/c

--

To Postage Expenses A/c

--

By Entrance Fees A/c

--

To Salary A/c

--

By Profit on sale of old sports

--

To Repairs & Maintenance A/c

--

material A/c

39

“Don't wish for it...work

for it!”


To Sports Materials Consumed

--

To Depreciation on Furniture A/c

--

To Miscellaneous Expenses A/c

--

To Prize Expenses A/c

--

To Surplus transferred to Capital

--

By Miscellaneous Receipts A/c

--

Fund A/c Total

--

Total

--

3. Balance Sheet: Balance sheet is prepared as usual, the only difference is that some new type of items may also be there in this case Like funds a/c. Important Point: 

Generally Mercantile/accrual system is followed, as it is the proper and complete system to measure the performance of entity and to show its financial position. Incomes are recognized when these are earned irrespective of whether amount is received or not. Similarly expenses are recognized when these are accrued irrespective of whether amount is paid or not. As a result we have to make adjustment for expenses outstanding (payable), prepaid, income outstanding (receivable) and advance-received etc.

Format of Balance Sheet Balance Sheet as at 31 st March, 2011 Liabilities

Rs.

Capital Fund:

Assets

Rs.

Fixed Assets:

Opening Balance

--

Furniture

--

Add: Surplus as per I&E A/c

--

Building

--

Add: Entrance Fees

--

Investments:

Add: Donation capitalized

--

Prize Fund Investments

--

Add: Donation in kind

--

--- Building Fund Investments

--

Prize Fund:

General Investment

--

Opening Balance

--

Current Assets:

Add: Donations Add: Income on Investment

---

Stock of Sports Material Subscription in arrears

---

Prepaid Expenses

--

--Less: Expenses incurred

--

Building Fund: Opening Balance

--

Add: Donations

--

40

--- Cash Balance

--

Bank Balance

--


for it!”

---

---

---


Add: Income on Investment

--

---

Current Liabilities: Creditors for sports material

--

Subscription in advance

--

Outstanding Expenses

--

Total

------

4. Receipt & Payment Account

Total

----

–



is a summarized cash book.



All receipts in that year may be loan, a capital receipt or an income will be Debited to Receipt & Payment a/c.



Similarly all payments made in this year may be for capital expenditure, repayment of loan, revenue expenditure etc. should be credited to Receipt & Payment A/c.



Balance of this a/c is the closing cash and bank balance and will appear in the balance sheet.

Format of Receipt and Payment A/c For the year ended on 31 st March, 2011 Dr.

Cr. Receipts

Rs.

To Opening Balance b/f: Cash

--

Bank

--

Payments

Rs.

By Rent

----

----

By Postage Expenses

----

To Subscription

----

By Furniture (Purchased)

----

To Entrance Fees

----

By Creditors for sports Material

----

To General Donations

----

By Cost of prizes

----

To Donations for Prize Fund

----

By Building Fund Investment

----

To Donations for Building Fund

----

By Match Expenses

----

To Sale of old Sports Materials

----

By Miscellaneous Expenses

To Interest on:

By

Prize Fund Investment

--

Building Fund Investment

--

General Investment

--

To Miscellaneous Receipts

Closing

Balance c/f:

Cash Bank

--

----

------------

41

-----


------

for it!”


5. Differentiation between Fund Account and Mon ey Fund word is used for Cash i.e. money in finance but when we talk of Fund a/c in accounts remember for ever that it is not money, rather it’s a notional account which gives information about the nature and purpose of receipt and has credit balance and appears on liability side. Money or cash has debit balance and hence appears on asset side. Just remind yourself of double entry say for donation or grant received for building fund. Cash/ Bank A/c Dr.

This is asset

To Building Fund A/c This shows the nature and purpose of above receipt. 6. Entrance Fees: The Trust collect entrance fees/ admission fees from the new members at the time of their admission a) If the amount is just sufficient to recover the expenditure incurred while admitting any member then it will be treated as revenue income and transferred to Income & Expenditure account. b) Otherwise the entrance fees can be Capitalized & transferred to the Trust Fund Account. OR; c) Entrance fees may be treated as deferred Income and shown in the Balance Sheet under the head "Entrance Fees Account" & written off every year by transferring to I & E A/c in proportion to the benefit extended to the members.

7. Membership or Subscription: 

These are usually charged yearly from the members hence are treated as revenue income and credited to I & E a/c.



When number of members and the rate of membership fees/subscription is given then income = number of member x rate per member.



Outstanding subscription i.e. subscription receivable will be shown on the asset side of balance sheet. Advance subscription i.e, unearned subscription will be shown on the liability side of balance sheet. Subscription A/c Particulars To Opening Outstanding B/f (Receivable) 42

Rs.

Particulars By Opening Advance B/f By Cash/Bank a/c


for it!”

Rs.


To Income & Expenditure a/c

(Received during the year)

(Income for the year)

By Closing outstanding C/f


(Receivable)

8. Accounting for In vestment: When organization has surplus funds, it can invest in securities or bank deposits etc. This investment apart from keeping money safe and liquid also gives incomes in the form of interest/ dividend. When funds for specific purpose are not immediately usable, then the same may be invested. As and when need of fund arises for that purpose, investments are sold and proceeds used for that purpose. Income and profit/loss on such investments will be credited to related fund a/ c and not to I & E a/ c. 9. Donations: Donations are the voluntary contribution provided by the well wishers for general or specific purpose. –

Credited to that fund a/c



If donations are received for a particular purpose



Otherwise general donations - credited to Income & Expenditure a/c.

10. Scholarship: Scholarship is the monetary benefit given to students under certain schemes 

by Govt. or other authorities etc. o

When received scholarship a/c will be credited and when paid to student scholarship a/c will be debited and hence in general it will not appear in financial statement.

o

In case of schools/ colleges, there may be credit balance in Scholarship a/c which represents Scholarship received from Govt. etc. but yet to be distributed to the students. This should be shown as liability in the Balance sheet. Debit balance in scholarship a/c may represent paid to student and recoverable from the concerned authority. This should be shown as an asset



in the Balance sheet. But if college has its own scholarship then that debit balance will go to I&E a/c.

11. Income & Expensditure of Specific Function: Income & Expenses on this account are netted & net balance is shown in the Income & Expenditure a/c.

43


for it!”


12. Missing data related to activity For ascertaining the missing information, if any, the accounts can be prepared. Whatever information of that a/c is available should be 1st entered and on balancing the account, we will get the missing information. It can be done by add less also. Income A/c Particulars

Rs.

To Opening Outstanding B/f (Receivable)

Particulars

Rs.

By Opening Advance B/f By Cash/Bank a/c

To Income & Expenditure a/c

(Received during the year)

(Income for the year)

By Closing outstanding C/f


(Receivable)

Expenses A/c Particulars To Opening Advance B/f

Rs.

(Prepaid)

Particulars By Opening Outstanding B/f

Rs.

(Payable)

To Cash/Bank a/c

By Income & Exp. A/c

(Paid during the year) To Closing outstanding C/f

(Expense for the year) By Closing Advance C/f

(Payable)

(Prepaid)

Consumables A/c Particulars To Opening stock balance b/f

Rs.

Particulars

Rs.

By I &E a/c

To Cash/R&P a/c (purchases)

(stationery used/ consumed)

To Creditors a/c (purchases)

By Closing stock balance c/f

13. Financial Statement Of Educational Institutions Whatever is discussed earlier is equally applicable to Education Institutes as these are also not for profit organization. Some distinct features may be as follows: 

It can have item like scholarship



It may have income like tuition fees, exam fees, etc.



It may run canteen, stationery shop, etc. for students.

44


for it!”

INVESTMENT ACCOUNTS

CHAPTER-11 INVESTMENT ACCOUNTS


Nov. 16

May 16

Nov. 15

May 15

8

4

8

10

8

1. Investment is an assets held for earning income by way of interest, dividend, rent etc. and by way of appreciation in its value. Investment can be the nature of properties

like

land

building

or

securities. 2. This Chapter covers only investment in securities. 3. Preparation of Investment Account 

Prepared for each type of Security separately.



Debited with opening balance & purchases and is credited on sale of security.



The balance left is carried to next year as an asset.



Profit or loss on sale is ascertained and transferred to the Profit & Loss Account.



For amount, three columns on each side (i.e. on debit and credit side) is maintained – 1 st for face value/ nominal value, 2 nd for Interest/ Income and 3 rd for principle amount.



Investment account is an account in the books of the party who has invested money in the security and not in the books of company who has issued the security. Format of Investment Account

Date

Face

Particulars

Value

Total 45

Income

Investments

Date

Particulars

Face Value

Income

Investments

Total

Focus on where you want to go, not where your currently are .

“

”

INVESTMENT ACCOUNTS

Journal Entry Date

Particulars

Dr. Rs.

Cr. Rs.

1. On Purchase of Investment Investment A/c

Dr.

(Ex-interest value)

Income/ Interest A/c

Dr.

(Interest amount)

To Bank A/c

(Cum-interest value)

2. On Sale of Investment Bank A/c

Dr.

(Cum-interest value)

To Investment A/c

(Ex-interest value)

To Income/ Interest A/c (Interest amount) 3. Profit on Sale transferred Investment A/c

Dr.

To Profit & Loss A/c 4. Loss on Sale transferred Profit & Loss A/c

Dr.

To Investment A/c 5. Opening Accrued Interest transferred Income/ Interest A/c

Dr.

To Opening Accrued Interest A/c 6. Closing Accrued Interest recognized Closing Accrued Interest A/c Dr. To Income/ Interest A/c 7. Periodic Interest/ Dividend received Bank A/c

Dr.

To Income/ Interest A/c (Interest amount) 8. Interest/ Income transferred Income/ Interest A/c Dr. To Profit & Loss A/c

46


“

”

INVESTMENT ACCOUNTS

4. What is included in Purchase &Sale Price? 

Purchase cost of securities includes Brokerage, Stamp charges etc. paid and



The sale value is taken net of Brokerage, Stamp charges paid.



Calculation of brokerage is usually on purchase/ sale price.

5. Interest on Investment: Calculated on face value/ nominal value 6. Cum-interest & Ex-interest 

Cum-interest: Price is inclusive of interest for the accrued period (from the last due date to till the date of purchase/ sale). Interest and principal amount therefore should be segregated.



Ex-interest: Price doesn’t include interest for accrued period and the same is received/ paid separately i.e. in addition to the price quoted.



If it is not mentioned whether the purchase or sale is ex-interest or cuminterest, it may be presumed as ex-interest.

7. Dividend Income Dividend for earlier period (Pre-acquisition dividend): Capital receipt and should be credited to Investment a/c (principal column). Dividend for later period (Post-acquisition dividend): Revenue income and should be credited to Income A/c (Income column). 8. Bonus Share 

Capitalize profits by issuing fully paid shares to the members. Such shares are known as bonus shares.



When bonus shares are received, entry is made only in the face value column.



In the principal column nothing comes as these shares are received free of cost.

9. Right Shares offered to the existing members in proportion to their existing shareholding.

47


“

”

INVESTMENT ACCOUNTS

10. Accounting for Right shares Right Shares Offered (Treatment thereof) Right shares subscribed for

Renounced without

Rights are sold

consideration

Rights allowed to lapse i.e. neither subscribed for nor renounced

Cost of rights shares added

No accounting

No accounting

to srcinal holdings carrying

treatment

treatment

amount Investments were

Other cases

acquired on cum-right basis Credit sales proceeds to Profit & loss account Market value on becoming

Market value on

ex-rights < Cum-rights price

becoming ex-rights > cum-rights price

Apply the sales proceeds to reduce the carrying amount

Credit sales proceeds

of investments to market

to Profit & loss account

value

48


“

”

COMPANY FINANCIAL STATEMENT

CHAPTER - 12 COMPANY FINANCIAL STATEMENTS


Nov. 16

May 16

Nov. 15

May 15

-

-

-

-

-

1. Books of Account etc. Section 128: At its registered office, books of accounts and other relevant books and papers and financial statement for every financial year including branches, on accrual basis and by double entry system. It can be maintained on electronic mode also. Maintained for minimum 8 (eight) previous financial year. 2. As per section 2(40) Financial Statement includes (a) Balance-sheet (b) Profit & Loss A/c (c) Cash Flow Statement (d) Statement of Changes in Equity (e) Explanatory Notes. 3. As per section 2(41) Financial Year should be ending on 31st March every year. 4. Balance Sheet should be in the Vertical Form given in Part-I of Schedule III of the Companies Act, 2013 [u/s. 129(1)] & Profit and Loss Account should be in the Vertical Form given in Part-II of Schedule III. 5. As per provisions to section 129 the companies for which separate forms are prescribed by the statue governing their activity need not follow Schedule III like Banking, Insurance & Electricity Companies. Acts & Regulations governing Electricity Co. do not provide any format for Financial Statement hence the same will be prepared as per Schedule III. 49

The only thing you have to fear is not giving 100%.

“

”


6. Schedule III do not prescribe any format for Cash Flow Statement hence it should be prepared as per AS-3 by direct method or by indirect method. 7. Managerial Remuneration 

Managerial remuneration is governed by the provisions of Section 197, 198 and Schedule V of the Companies Act, 2013.



Section 197 is regarding limits of managerial remuneration.



Section 198 is regarding computation of Net profit for managerial remuneration.

8. Maximum Limits on Managerial Remuneration Payable by a Public Co.: Section 197 

Overall Managerial Remuneration 11% Net Profit (u/s. 197(1))



Remuneration to Managing/ Whole time director/ Manager: (a) If there is one Managing/ Whole time Director/ Manager 5% Net Profit [u/s.197(1)(i)] (b) If more than one Managing/ Whole time Director/ Manager 10% of Net Profit [u/s. 197(1)(i)]



Remuneration to part tim e Director’s: (a) If there is no M.D/ Whole time Director 3% of Net Profit [u/s. 197(1)(ii)] (b) If there is one or more M.D/ Whole time Director 1% of Net Profit [u/s. 197(1)(ii)]

9. Net Profit for calculating Managerial Remuneration? 

For Ascertaining Profit for calculating managerial remuneration following points to be considered (U/s. 198). Should be taken as Income Subsidies received from Income government/ public authority

Should not be taken as income 





50

Premium on shares or debentures, Profit on sale of forfeited shares, Profit of capital nature


“

”


Should not be taken as

Should be taken as Expenses 

All usual working charges,



bonus or commission to

Expenses

employees, Expenses



Interest on debentures,



Interest

on

unsecured

 

secured

or

loans

&



advances, 

Repairs expense on movable or

immovable

(Repairs

not

property of

Expenses like Income tax Provision, Voluntary compensation, Bad debt provision, Preliminary Expenses Written off, Share/ Debenture Discount written off Not to be considered in calculation of Net Profit i.e. if the same are already debited in P&L, it should be added back.



capital

nature). Note: 

On sale of Immovable Property or Fixed Assets: Profit to the extent it is not higher than the difference between WDV & Original cost is taken as income.



Excess (i.e. sale value – cost) should not be taken as income. Depreciation: As per section 123 Depreciation provided as per useful life provided in Schedule II is allowed as expenditure.



Directors remuneration shall not be deducted

10. Provisions regarding remuneration in case of loss or inadequate profits. Managerial Remuneration in case of no profit or inadequate profit as per Part –II of Schedule V will be as follows. (If remuneration exceeds the limit then permission of Central Government will be needed). Yearly remuneration shall Effective Capital of the Company

not exceed Applicable

Negative or Less than Rs. 5 crore

60,00,000

Rs. 5 crore or more but less than Rs. 100 crore

84,00,000

Rs. 100 crore or more but less than Rs. 250 crore 51

1,20,00,000


“

”


1,20,00,000 + .01% of Effective

Rs. 250 crore or more

capital above Rs. 250 crore

All the Amendments highlighted in

this colour.

Effective capital for this purpose is calculated as follows: (at the end of the previous financial year to year in which appointment of such managerial personal is made & in case of year of incorporation on the date of appointment). Paid up Share Capital (excluding application money or advance against shares)

----

+ Share Premium, Reserves & Surpluses (excluding revaluation reserve)

----

+ Long Term loans & Deposits repayable after one year (excluding working capital ---loans, OD, Interest due thereon, Bank guarantees & other short term arrangements) Less: Investments (except in case of Investment Co.), accumulated losses, Preliminary ---expenses not written off. Effective Capital

----

11.

PART I : SCHEDULE III BALANCE SHEET Name of the Company ________ Balance Sheet as at ________ (Rupees in ……..)

Particulars

1 I.

Note No. 2

Figures as at the

Figures as at the end of the

end of the current reporting period

previous reporting period

3

4

EQUITY AND LIABILITIES

(1) Shareholders’ Funds

(a) Share Capital (b) Reserves and Surplus (c) Money received against share warrants (2) Share application money pending allotment (3) Non-current liabilities

(a) Long-term borrowings (b) Deferred tax liabilities (Net) 52


“

”


(c) Other long term liabilities (d) Long-term provisions (4) Current liabilities

(a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short term provisions TOTAL II. ASSETS (1) Non-current assets

(a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long-term loans and adv ances (e) Other non-current assets (2) Current assets

(a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets TOTAL

PART II : SCHEDULE III STATEMENT OF PROFIT AND LOSS Name of the Company _________ Profit and Loss statement for the year ended ___________

Particulars

Note No.

(Rupees in ………)

Figures for the

Figures for the

current reporting

previous

period

reporting period

REVENUE:

I. 53

Revenue from operations


“

”


II.

Other income

III.

Total Revenue (I+II) EXPENSES:

Cost of material consumed Purchase of Stock-in-Trade Changes in inventories of finished goods work-in-progress and Stock-in-Trade Employee benefit expense Finance costs Depreciation & amortization expenses Other expenses IV.

Total Expenses

V.

Profit before exceptional and extraordinary items and tax (III – IV)

VI.

Exceptional Items

VII.

Profit before extraordinary items and tax (V –VI)

VIII. Extraordinary Items IX.

Profit before tax (VII – VIII)

X.

Tax expenses: (1) Current tax (2) Deferred tax

XI.

Profit (loss) for the period from continuing operations (VII –VIII)a

XII.

Profit/(loss) from discontinuing operations

XIII.

Tax expense of discontinuing operations

XIV. Profit/(loss) from discontinuing operations (after tax) (XII – XIII) XV.

Profit (Loss) for the period (XI + XIV)b

XVI. Earnings per equity share: (1) Basic (2) Diluted

54


“

”

AMALGAMATION

CHAPTER - 13 AMALGAMATION


Nov. 16

May 16

Nov. 15

May 15

16

-

16

-

16

1. Amalgamation: When a new company is formed to take-over the business of two or more

existing

companies,

it

is

called

amalgamation. 2. Absorption: When an existing company takes over the business of one or more existing companies, it is called absorption. (In AS-14 the absorption is also referred to as amalgamation only). 3. External Reconstruction: When a new company is formed to take over an existing company it is known as external reconstruction. (Not an Amalgamation as per AS14.) Nature of arrangement

Before

After

Amalgamation

A Ltd. + B Ltd.

 C Ltd.

Absorption

M Ltd. + N Ltd.

 M Ltd.

X Ltd.

 New X Ltd.





External Reconstruction

Companies known as

Vendor company

Purchaser company

Transferor

Transferee company

company

Amalgamated

Amalgamating

company

company (Except M Ltd.) 4. Purchase Consideration: AS-14 defines consideration for the amalgamation means the aggregate of the shares & other securities issued and the payment made in the form of cash or other assets by the transferee co. to the shareholders of the transferor

55

Remember, if you want a different result, do something different.

“

”

AMALGAMATION

co. (Therefore payment to debenture holders/ creditors etc. excluded from the figure of purchase consideration and be accounted separately.) 

Purchase consideration may be given in question in either of the following 3 ways:

a. Calculated lump-sum amount may be given. b. Payment Basis: P.C. = (No. of shares X issue price) + (No. of debentures X issue price) + cash/ other assets etc. c. Assets taken over Basis: If (1) OR (2) as above is not given then this method will be applicable. P.C. = Assets taken at agree value + Goodwill if to be considered (-) Liabilities taken over Fictitious assets or Exp. not w/off should not be added and General Reserve, funds etc. which represents undistributed profit should not be deducted while calculating P.C. as above. 5. Types Of Amalgamation: Amalgamation for accounting purposes can be classified into two categories: 



Amalgamation in the nature of merger, and Amalgamation in the nature of purchase.

6. Amalgamation in the Nature of Merger: Amalgamation in the Nature of Merger is a type of amalgamation, which satisfies all the following conditions. a. All the assets and liabilities of the transferor company become of the transferee company. b. Not less than 90 percent of the face value of the equity shares of the transferor company become equity shareholders of the transferee company c. The consideration for the amalgamation by those equity shareholders by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional shares. d. The business of the transferor company is intended to be carried on e. No adjustment is intended to be made to the book values of the assets and liabilities except to ensure uniformity of accounting policies.

56


“

”

AMALGAMATION

7. Amalgamation in the Nature of Purchase: Amalgamation in the nature of Purchase when one or more of the 5 conditions specified for amalgamations in the nature of merger is not satisfied. 8. Purchase Method: When amalgamation in the nature of purchase. Following factors should be considered while making accounting entries in this method: Assets and liabilities shown at agreed value. The reserves (whether capital or revenue or arising on revaluation) should not be included in the financial statements of the transferee company. Any excess of the PC over the value of net assets treated as goodwill and debited to goodwill account. On the other hand, if the PC is lower than the value of net assets acquired, the difference should be credited to capital reserve. 9. Give journal entries in case of purchase method The following journal entries are appropriate for incorporating the financial statement of the Transferor Company in the books of transferee Co. (Purchaser Co.) (1) Business Purchase A/c Dr.

With value of purchase consideration payable

To Vendor A/c (2) Assets A/c Dr.

All assets taken over with their respective values which Purchasing Co. wants to show/ Agreed value.

To Business Purchase A/c

Amount of Purchase consideration (as in entry 1)

To Liabilities A/c

Value at which take-over the liabilities.

In the above entry – If debit is short, the difference (it is the extra purchase consideration paid) is Debited to Goodwill A/c. If Credit is short, the difference (it is less purchase consideration, hence capital profit) is credited to Capital Reserve A/c. (3) Vendor’s A/c Dr. Debenture Discount A/c Dr. To Equity Share Capital A/c

Purchase Consideration discharged by issue of shares

To Preference Share Capital A/c

Debentures (at par, premium or discount) & cash payment

To Debenture A/c To Share/ Debenture premium A/c 57


“

”

AMALGAMATION

To Cash A/c (4) Goodwill/ Capital Reserve A/c Dr.

If acquisition/ winding up expenses are paid & borne by

To Cash A/c

Purchasing Co.

10. Statutory Reserves: (Following entries required only in case of ‘Purchase Method’.) 

If it becomes necessary to carry forward any statutory reserve Amalgamation Adjustment A/c To Statutory Reserve A/c



Dr. (with the amount)

The Amalgamation Adjustment Account should be disclosed is now to be presented as a separate line item since there is not sub-heading like ‘miscellaneous expenditure’ in Schedule III to the Companies Act, 2013 as a

part of other current or non-current asset (depending on the period) in the balance sheet. All the Amendments highlighted in 

this colour.

Statutory reserve is no longer required to be maintained Statutory Reserve A/c

Dr.

To Amalgamation Adjustment A/c 11. Entries in the book of vendor to close the books: In both the cases i.e. amalgamation in the nature of merger & amalgamation in the nature of Purchase, accounting will be same in the books of vendor. AS-14 is silent regarding accounting in the books of Vendor/ Transferor) 12. Draft Journal Entries in the Books of Vendor (Transferor) Co. (1) All assets to be transferred to realization account at book values except cash/ Bank balance unless these are taken over by the Purchasing Co. Realisation A/c Dr. To Assets A/c (2) All liabilities are to be transferred to realization a/c except Partners capital/ share capital, Reserves, P&L a/c etc. Liabilities A/c 58

Dr.


“

”

AMALGAMATION

To Realisation A/c (3) The amount of purch ase consideration due Purchasing Co. A/c

Dr.

To Realisation A/c (4) Assets & Liabilities not taken over by Purchas ing Company will be realized/ paid separately CashA/cDr.

Assetssold

To Realisation A/c Realisation A/c Dr.

Liabilities paid

To Cash A/c (5) Expense to take over/ wind ing up are also to be debite d to realization a/c., If Vendor Co. is to bear the expenses. Realisation A/c Dr. To Cash A/c (6) Capital a/c / Equity share capital a/c, Reserves-Surpluses, P&L a/c (Cr.), Realisation a/c (Cr.) etc. will be transferred (Credited) to Partners/ Equity Shareholders A/c. P&L a/c (Dr.), Miscellaneous Expenses & Balance of Realisation a/c (Dr.) will also be transferred (Debited)to Partners/ Equity Shareholders a/c. Note: The Profit, Reserves and Surplus or losses etc. of a Company belongs to its equity shareholders in proportion to the No. of shares held by them. (8) On receipt of Purchas e consideration. Shares A/c Dr. Debentures A/c Dr. Cash A/c Dr. To Purchasing Co. A/c (8) Preference Shareholder/ Debenture holders A/c will be settled by giving them share, Debentures or Cash as may be given in the question. (9) Balance Shares, Debentures and Cash will be distributed to Partners/ Equi ty Shareholders. With this all the accounts will get closed.

59


“

”

AMALGAMATION

13. Pooling of Interest Method 

This method of accounting is applicable for amalgamation in the nature of merger.



In the books of the transferee company, the assets, liabilities and reserves of the transferor company should be recorded at their existing book value.



The balance of the Profit and Loss Account of the transferor company should be aggregated with the corresponding balance of the transferee company.



This reflects the fact that the entries are simply merged together.



No goodwill account should be accounted for and the difference will be adjusted in reserve of the transferee company.

14. Entries in case of pooling of Interest method The following journal entries are appropriate for incorporating the financial statements of the Transferor Company in the books of transferee Co. (Purchaser Co.) (1) On amalgamation of the business entry for purchase consideration due. Business Purchase A/c Dr.

(with the amount of purchase

consideration)

To Liquidator of Transferor Company A/c (2) When assets, liabilities and reserves are taken-over from the transferor company and incorporated in the books. Sundry Assets A/c (individually) Dr.

(book value)

To Sundry Liabilities A/c

(individually) (book balance)

To Profit and Loss A/c

(book balance)

To Reserves A/c

(book balance)

To Business Purchase A/c

(book value)

The difference between the debits and credits is adjusted in the reserves of the transferee company. (3) When the purchase cons ideration is satisfied. Liquidator of Transferor Company A/c Dr. (purchase consideration amount) To Share Capital A/c (Share capital issued) To Share Premium A/c (premium amount) (or debit Discount on issue of shares) To Cash A/c (for fractional shares & dissenting shareholders) 60


“

”

AMALGAMATION

(4) For Liquidation expenses paid: P&L A/c/ General Reserve A/c

Dr.

To Cash/ Bank A/c If acquisition/ Winding up expenses are paid & borne by Purchasing Co. 15. Table of Comparison – Accounting in the books of Purchasing Company Sr. No. 1.

Item

Amalgamation in the nature of

Amalgamation in the nature of

Merger (Pooling of interest method)

Purchase (Purchase method)

Asset & Liability

• All are taken over

• All or some are taken over

of transferor

• Accounted at book value

• Accounted at book value or revalued value (fair value)

2.

Reserve of

All are recorded as it is

Not recorded

Statutory reserve

Already included in (2) above,

Amalgamation adj. A/c Dr.

of transferor

therefore no separate entry

To Statutory Res. A/c

transferor 3.

required. 4.

5.

Goodwill/ Capital

Difference between P.C & paid Difference between P.C & net

reserve

up capital of transferor co. is adjusted in reserves

Liquidation or

Reserves/ Profit & Loss A/c Dr. Goodwill/ Capital Reserve Dr.

amalgamation

To Cash/ Bank A/c

assets taken over is either goodwill or capital reserve To Cash/ Bank A/c

exp. incurred by transferee co. 6. 7.

Stock reserve on

Reserves/ Profit & Loss A/c Dr. Goodwill/ Capital Reserve Dr.

inter co. stock

To Stock Reserve/ Stock A/c

To Stock Reserve/ Stock A/c

Inter co. debt.

BP/ Creditor/ Loan Dr.

BP/ Creditor/ Loan Dr.

(mutual debt)

To BR/ Debtor/ Loan A/c

To BR/ Debtor/ Loan A/c

cancelled

61


“

”

INTERNAL RECONSTRUCTION

CHAPTER - 14 INTERNAL RECONSTRUCTION


Nov. 16

May 16

Nov. 15

May 15

-

16

-

20

-

1. The scheme is prepared with the approval of Shareholders Debentures holders & other creditors whose interest is affected and is sanctioned by the Court. 2. It

is

normally

adopted

when

company has accumulated losses, fictitious assets or its other assets are having market values lower than the book values. 3. As per the scheme the Equity Share Capital/ Pref. Share Capital/ Debentures and other liabilities are reduced by agreed amount and this balance is used to write off fictitious assets like P&L A/c (Dr. Balance), Discount/ Commission on shares/ Debentures, Preliminary Expenses, Goodwill, Useless patents, trade marks etc. and to reduce other assets to their proper values. 4. Any balance left then is transferred to Capital Reserve A/c. 5.

JOURNAL ENTRIES FOR INTERNAL RECONSTRUCTION 1) Equity Share/Preference share/Debentures/ other liabilities A/c To

New

Equity

Share/Preference

share/Debentures/

Dr. other

liabilities A/c (If any) To Capital Red./Reconstruction/Reorganization A/c (with the amount of Reduction agreed) Note: When the description of Capital A/c. (Like Pref. share/ debenture) is changed altogether then old Capital A/c should be debited with full 62

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”

INTERNAL RECONSTRUCTION

amount, amount of reduction should be credited to Capital Reduction A/c and Balance should be credited to New Capital A/c. 2) Capital Reduction/Reconstruction/Reorganisation A/c

Dr.

*To P&L A/ e. (Debit Balance) *To Discount/Common Shares/Debentures A/c *To Preliminary Expenses A/c To Goodwill A/c To Stock, Plant and Machinery, Building etc. A/c (Amount of Capital reduction utilised to write-off various losses & Assets) *Such items should be written-off even in absence of any direction in the question to write it off. 3) Capital Reduction/Reconstruction a/c balance left if any transferred to Capital Reserve Reorganization A/c

Dr.

To Capital Reserve A/ c

63

What have you done today to help you reach your lifelong goals?

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CASH FLOW STATEMENT

CHAPTER - 15 CASH FLOW STATEMENT


Nov. 16

May 16

Nov. 15

May 15

-

8

-

8

5

financial statement 1. The traditionally includes profit

which & loss

account and balance sheet does not provide

the

details

of

financial

movements during the year. This is being fulfilled by preparing fund flow or cash flow statement. 2. On preparation of Cash Flow statement the ICAI has issued AS-3. 3. Cash here includes Cash & Cash equivalent hence Cash flow will include items resulting into inflow and outflow of Cash and Cash equivalents. 4. The main requirements of AS-3? 

Cash flow statement is simply a Receipt and Payment account presented in the prescribed form.



Cash flows are inflows (receipt) and out flows (payments) of cash and cash equivalent.



Cash flows should be classified in cash flow statement into Operating, Investing and Financing cash flows.



Operating cash flow should be determined by using either Direct Method or Indirect Method.

5. Term cash & cash equivalent. 

Cash includes cash in hand and demand deposits with bank.



Cash equivalent are short term, highly liquid investment can include fixed deposits with bank.

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You are what you repeatedly do. Excellence is not an event - it is a habit.

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CASH FLOW STATEMENT

6. Operating Activities, Investing Activities and Financing Activities. a. Operating activities: The principal revenue producing activities of the enterprise and other activities that are not investing or financing activities are also shown here. Example: Collection from cash sales & debtors, Payment for goods, wages & operating expenses. b. Investing activities: The acquisition and disposal of long term asset and other investments (investments which are not included in cash equivalent) plus loans given and its return. Example: Sale & purchase of fixed asset, investment, interest dividend on investment. c. Financing activities are activities that result in changes in the size and composition of the owner’s capital (including preference share capital in the case of a company) and borrowings of the enterprise. Example: Issue of Shares, debentures, Dividend & Interest on the same. Note: Loans given and refund of the same will be an investing activity. Whereas loans taken and repayment thereof will be a financing activity. 7. Important Points in Connection With Cash Flow Statement. 

Issue of bonus shares, conversion of debentures into equity shares or shares issued to the vendors in case of business purchases do not constitute inflow of cash.



If assets/ investments are purchased by issue of shares or debentures, this will not constitute application/ outflow of cash. Similarly, if purchases fixed asset/ investments are on credit, these will not constitute cash outflow.

8. Simple test to check if it is an item of cash flow or not From a journal entry for any transaction and see: 

if debit is to any cash and cash equivalent item (i.e. Cash/ bank, etc) then it is



an item of Cash inflow. if credit is to any cash and cash equivalent item (i.e. Cash/ bank, etc) then it is an item of Cash outflow.



if debit/ credit is not to any cash and cash equivalent item (i.e. Cash/ bank, etc) then it is not an item of Cash flow.

65


“

”

CASH FLOW STATEMENT



if debit as well as credit is to any cash and cash equivalent item (i.e. Cash/ bank, etc.) then it is a movement within the elements of cash and hence it is not an item of cash flow.

9. Give format of Cash Flow Statement as prescribed by Accounting Standard Cash Flow Statement as per AS-3 (direct Method) For the year ending ….. Rs.

Rs.

A. Cash flows from operating activities

Cash receipts from customers & cash sales

….

(-) Cash payments to suppliers & cash purchases

….

(-) Cash paid to employees

….

(-) Other cash payments (for overheads/ expenses)

….

Cash generated from operations

….

(-) Income taxes paid

….

Net cash from operating activities

….

(+) Profit/ (-) Loss from extra-ordinary activities

….

Total Cash available from operating activity:

…..

Note: Minus figures will be indicated by writing them in brackets in cash flow statement. Rs.

Rs.

B. Cash flows from investing activities

(-) Purchase of Fixed assets, Investments

….

(-) Loans, Advances given

….

(+) Sale of Fixed assets, Investments

….

(+) Loans & Advances received back

….

(+) Interest & Dividend received

….

(b) Net cash available from investing activity (If+)/ used (If - )in investing activities

…..

C. Cash flow from financing activities

66

(+) Proceeds from issuance of share capital/ debentures, Loans taken

….

(-) Repayment of Pref. Capital/ debentures/ loans, share buy back

….

(-) Interest paid, Dividends paid

….


“

”

CASH FLOW STATEMENT

(c) Net cash from (If +)/ used (If -) in financing activities

…..

Net increase/ decrease in cash (and cash equivalents) (a+b+c)

….

Cash (and cash equivalents) at beginning of period Cash (and cash equivalents) at end of period

10. Other Items a. Extra Ordinary Items 

Cash flow from extra-ordinary item shall also be classified in operating, investing and financing activity. If such categorization is not possible then show it in operating cash flow.

b. Interest & Dividends Interest and dividend shall be classified as followso

o

For a financial enterprise 

Interest paid, Interest and received as operating activity



Dividend paid as financing activity.

For other enterprises 

Interest & dividend paid as financing activity.



Interest & dividend received as investing activity.

c. Income Tax 

Cash flow from income tax will be shown in operating activity unless it can be specifically identified with investing or financing activity.

11. Give format of Cash Flow Statement as prescribed by Accounting Standard Cash Flow Statement as per AS-3 (Indirect Method) For the year ending ….. Rs.

Rs.

A. Cash flows from operating activities

Net profit before taxation (excluding extra-ordinary profits & losses)

….

Adjustments for: Non-cash items: (+) Depreciation, Preliminary exp. W/ off etc.

….

(-) Gain on sale of Investment/ Fixed assets

….

Items treated separately: (+) Interest expenses (-) Interest, ,dividend income

67

….

(+) loss on sale of Investments/ Fixed assets

…. ….


“

”

CASH FLOW STATEMENT

Operating profit before working capital changes:

….

(+) Decrease in accounts receivable/ debtors, Inventory, Pre-paid exp., Advances etc.

….

(+) Increase in accounts payable/ creditors, accrued liability, provisions etc.

….

(-) Increase in accounts receivable/ debtors, Inventory, Pre-paid exp., Advances etc.

….

(-) Decrease in accounts payable/ creditors, accrued liability, provisions etc.

….

Cash generated from operations:

….

(-) Income taxes paid

….

(a) Net cash from operating activities: (+) Profit/ (-) Loss from extra-ordinary activities

…. ….

Total Cash available from operating activity:

…..

12. Under Indirect Method format of Cash flow from Investing & Financing activities is same.

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”

ACCOUNTING STANDARDS

CHAPTER-16 ACCOUNTING STANDARDS Marks Allocated on this Topic in Previous 5 Examinations May 17

Nov. 16

May 16

Nov. 15

May 15

20

20

28

20

23

The Accounting Standards included here in this chapter are only those are covered in IPCC Group I course. AS- 1

Disclosure of Accounting Standards

AS-2

Valuation of Inventories

AS-3

Cash Flow Statement

AS-6

Depreciation Accounting [Omitted]

AS-7

Accounting for Construction Contract

AS-9

Revenue Recognition

AS-10

Accounting for Fixed Asset [Omitted]

AS-10

Property, Plant & Equipment

AS-13

Accounting for Investments

AS-14

Accounting for Amalgamations

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Hope doesn't guarantee anything - hard work does.

”


AS-1 DISCLOSURE OF ACCOUNTING POLICY 1. Preparation of financial statements is the responsibility of the management. 2. This includes selecting appropriate accounting policies and applying them consistently from one period to another. 3. Financial statements include: Profit & Loss Account, Balance Sheet, Cash Flow (if prepared), and Notes to Accounts. 4. Disclose all significant policies preferably at one place. 5. The accounting policies refer to: 

The specific accounting principles and



The methods of applying those principles in the preparation and presentation of financial statements.



Different Accounting Policy Areas

Methods

of

Differing Accounting Policies Possible depreciation, Straight line method, Written down value

depletion and amortization

method

Valuation of inventories

Different cost formula average cost, etc.

Valuation of Investments

Cost, lower of cost and fair value, fair value

FIFO,

Weighted

Recognition of profit on long- Percentage of completion method, different term contracts

ways of measuring percentage of completion.

6. Primary consideration in Selection of Accounting Policies - true and fair view of the financial Statement Major considerations are prudence, substance over form, and materiality 

Prudence: In view of uncertainty associated with future events, profits are not anticipated, but losses are provided for as a matter of conservatism.



Substance over Form: [Reality vs. Legality] Legality is not important but reality.



Materiality : Financial statements should disclose all ‚material‛ items.

7. Fundamental Accounting Assumptions 

70

a. Going Concern b. Consistency c. Accrual “


”




Disclosure is necessary if they are not followed.

8. Disclosure: 

Changes in accounting policies and the effect of the change on the financial statements.

AS-2 VALUATION OF INVENTORIES 1. Inventories are assets: a) held for sale in the ordinary course of business (finished goods); b) in the process of production for such sale (work-in-process); or c) in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials, stores and loose tools). Inventories do not include spare parts, servicing equipment and standby equipment which meet the definition of property, plant and equipment as per AS 10, Property, Plant and Equipment. Such items are accounted for in accordance with Accounting Standard (AS) 10, Property, Plant and Equipment. All the Amendments highlighted in

this colour.

2. Valued at the lower of cost or net realizable value. 3. Cost 

It Includes - Cost of Purchase, Cost of Conversion & Other Cost Incurred to bring it at its Present Location & Condition



It Excludes - Abnormal Losses & Wastages, Storage cost , Administrative expenses, Selling & Distribution cost & interest and Borrowing Cost.

4. Cost of Purchase: The costs of purchase consist of the 

Purchase price,



duties and taxes,



freight inwards and



other expenditure directly attributable to the acquisition.

Following should be deducted from cost of purchase 71

“


”


Trade discounts, rebates, duty drawbacks and Duties and taxes which are subsequently recoverable by the enterprise from the taxing authorities (example Cenvatable excise duty) 5. Cost of Conversion - Costs directly related to the units of production, Material, Labour, Variable Production Overheads (Actual Production Basis), Fixed Production Overheads (Normal Capacity Basis) 6. Other Cost 

Other costs are included in the cost of inventories incurred in bringing the inventories to their present location.

7. Net Realisable Value 

Finished Goods - Sale Value expected at Balance Sheet date (-) selling expenses



Raw Material - The replacement price including cost of completing the purchase. At cost – If finished goods are sold at or above cost), otherwise at replacement cost



WIP - It is sale value of finished goods at balance sheet date (-) cost necessary to make the sale (-) estimated costs of completion of WIP to finished Goods.

8. Points to Remember: 

Cost Formula can be use Specific Identification of Costs, FIFO or Retail Price Method but LIFO Method is not allowed.



Inventories are usually written down to net realizable value on an item-by-item basis.



It may be appropriate to group similar or related items of inventory.

9. Classification of Inventories Common classifications of inventories are: (a) Raw materials and components (b) Work-in progress (c) Finished goods (d) Stock-in-trade (in respect of goods acquired for trading) (e) Stores and spares (f) Loose tools (g) Others (specify nature)”.

72

“


”


Explanation: AS 2 requires disclosure of inventories under different classifications. One residual category has been added to the said paragraph i.e. ‘Others’. All the Amendments highlighted in

this colour.

10. Disclosure The final statements should disclose: 

The accounting policies adopted in measuring inventories, including the cost formula used;



the total carrying amount of inventories



Classification appropriate to the enterprise.



Common classification of inventories are raw materials and components, work in progress, finished goods, stores and spares, and loose tools.

AS-3 CASH FLOW STATEMENT

AS-3 Cash Flow Statement has been covered in Cash Flow Statement chapter.

AS-6 DEPRECIATION ACCOUNTING

Old AS-6 has been omitted. The provisions relating to depreciation are now covered in AS-10 Property, Plant & Equipment.

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”


AS-7 ACCOUNTING FOR CONTRUCTION 1. AS 7 prescribes the principles of accounting for construction contracts in the financial statements of contractors. 2. This AS is applicable only to contractor Note: 3. Service contracts are not included in construction contracts. 4. A construction contract is one, by which a contractor agrees to build some asset for his customer. 5. Contractor's Profit = contract price - construction costs 6. Types of Construction Contracts 

Fixed Price Contract - Price is agreed as fixed sum. There may be escalations Clause.



Cost plus contract - Cost incurred plus specified percentage.

7. Percentage Completion Method 

Recognise revenue annually in proportion of progress of work to be matched with corresponding construction costs incurred in that year. This method of



accounting, called the percentage completion method. AS 7 prescribes that the percentage completion method should not be used unless it is possible to make a reasonable estimate of the final outcome of the contract.

8. AS 7 provides that whenever total contract cost is expected > the total contract revenue, the loss should be recognised as an expense IMMEDIATELY. 9. Stage of Completion = 

[Cost Incurred /Estimated Cost] x 100



surveys of work performed; or



completion of a physical proportion of the contract work

10. Progress payments and advances received from customers may not necessarily reflect the work performed 11.

Calculation of Profit Particulars

Amount

Contract Revenue x Degree of Completion

xxx

Less : Contract Cost incurred upto date 74

“


”


Total Profit

xxx

Less: Profit Recognised Earlier

xxx

Current Year Profit

xxx

12. Uncollectable Contract Revenue 

When an uncertainty arises about the collectability of an amount already included in contract revenue, and the uncollectable amount is recognized as an expense rather than as an adjustment of the amount of contract revenue.

13. As Per AS 7 ‚Contruction contracts‛ when a contract covers number of assets, the construction of each asset should be treated as a separate construction contract when 

Separate Proposals have been submitted for each asset.



Each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset and



Cost and revenues of each asset can be identified.

14. Disclosure 

the amount of contract revenue recognised as revenue in the period;



the methods used to determine the stage of completion of contracts in progress



the amount of advances received;



the amount of retentions.



the gross amount due from customers for contract work as an asset;



the gross amount due to customers for contract work as a liability.

AS-9 REVENUE RECOGNITION 1. Revenue is the gross inflow of cash or receivables arising in the course of the ordinary activities of an enterprise from the sale of goods, rendering of services, and from the use by others of enterprise resource yielding interest, royalties and dividends.

75

“


”


2. AS-9 Does not deal This AS does not deals with revenue from construction contracts; [AS-7] from hire-purchase, lease agreements; [AS-19] from government grants [AS-12] From foreign exchange [AS-11] From sale of Fixed Assets or Investment [AS-10 & AS-13] 3. Sales of Goods Revenue is recognised from sale of goods if following conditions are satisfied Condition 1 - Ownership of goods have been transferred (bill Issue) & Condition 2 - Risk and rewards have been transferred & Condition 3 - There is no uncertainty regarding consideration & collection 4. Rendering of Services 

Proportionate completion method which recognises revenue proportionately with the degree of completion of services under a contract.



Completed service contract method is a method of which recognises revenue only when the rendering of services under a contract is completed.

5. Other 

Interest: Time proportion basis



Royalties: Accrual basis



Dividends: owner’s right to receive payment is established.

6. Effect of uncertainties on Revenue Recognition: Revenue recognition is postponed to the extent of uncertainty involved. In such cases: 

When the uncertainty arises subsequent to the time of sale or the rendering of



the service – Make a Provision When the uncertainty arises at the time of sale or the rendering of the service – Postponed the recognition.



When consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

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”


AS-10 FIXED ASSET Old AS-10 has been omitted. The provisions relating to depreciation are now covered in New AS-10 Property, Plant & Equipment.

AS-10 PROPERTY, PLANT & EQUIPMENT 1. Meaning : Property, plant and equipment are tangible items that: a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b) are expected to be used during more than a period of twelve months. 2. Recognition Criteria The cost of an item of property, plant and equipment should be recognised as an asset if, and only if: a) it is probable that future economic benefits associated with the item will flow to the enterprise; and b) the cost of the item can be measured reliably. 3. Scope This Statement should be applied in accounting for property, plant & equipment, except the following items: a) biological assets other than bearer plants and b) wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources. Biological Asset is a living animal or plant. Bearer plant is a plant that -

77



is used in the production or supply of agricultural produce;



is expected to bear produce for more than a period of twelve months; and “


”


has a remote likelihood of being sold as agricultural produce, except for



incidental scrap

sales.

Example: Orange Tree, Apple tree, Rubber tree etc



4. The cost of an item of Property, Plant & Equipment comprises: 

its purchase price,



import duties and



other non-refundable purchase taxes and



the initial estimate of the costs of dismantling, removing the item and restoring the site on which it is located, referred to as 'decommissioning, restoration and similar liabilities',



any directly attributable cost of bringing the asset to its working condition for its intended use; examples of directly attributable costs are: o

Cost of employee benefit arising out of construction or acquisition of such asset

o

site preparation;

o

initial delivery and handling costs;

o



installation cost and assembly cost, such as special foundations for plant; and

o

Cost of testing, trial runs less sale proceeds of any sample etc.

o

professional fees, for example fees of architects and engineers.

any trade discounts and rebates should be deducted in arriving at the purchase price.

5. Examples of costs that are not costs of an item of property, plant and equipment are: 





costs of opening a new facility or business, such as, inauguration costs; costs of introducing a new product or service (including costs of advertising and promotional activities); costs of conducting business in a new location or with a new class of customer (including costs of staff training); and



78

administration and other general overhead costs.

“


”




initial operating losses, such as those incurred while demand for the output of an item builds up; and



costs of relocating or reorganising part or all of the operations of an enterprise.

6. The cost of a self-constructed fixed asset should comprise – 

Those costs that relate directly to the asset; and



Those costs that are attributable to construction activity in general and can be allocated to that specific asset.

7. Treatment of Spare Parts, Stand by Equipment and servicing Equipment. 

If they meet the definition of PPE as per AS 10 – Recognised as PPE as per AS10 If they don’t meet the definition of PPE as per AS 10 – Classified as Inventory as per AS 2

8. Subsequent Costs Sr. 1.

Type of subsequent expenditure

Accounting treatment prescribed

Expenditure which meets the definition Include in the gross book value of of property, plant & equipment and the asset (i.e. capitalize)

2.

satisfies the recognition criteria. Any other expenditure (i.e. expenditure Expense as incurred. for day to day services or for repair and maintenance)

9. Measurement Measurement at Recognition An item of property, plant and equipment that qualifies for recognition as an asset should be measured at its cost. Measurement after Recognition Accounting Policy: An enterprise should choose either the cost model or the revaluation model as its accounting policy and should apply that policy to an entire class of property, plant and equipment. Cost Model : After recognition an asset, should be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

79

“


”


10. Accounting Treatment of revaluation Subsequent revaluation

1st time Revaluation Upward

Credit

Upward

the Credit

Downward

increase

to To the extent there is

revaluation increase to the revaluation surplus

credit

balance

in

revaluation

revaluation surplus of

surplus

that asset, it should be charged directly to that account. The balance decrease if any to be charged

to

P&L

account Downward Debit revaluation decrease

the To

the

such Debit the decrease to P

to increase is reversal of a & L

profit and loss decrease a/c

extent on

previous

revaluation of the same asset, it should be credited to profit and loss account. increase

The

balance

should

be

credited to revaluation reserve. 11. Depreciation on revalued assets Charge depreciation on revalued value.

12. Accounting for revaluation and subsequent revaluation of an asset can be understood with the help of following alternatives. (+) represents increase and (-) represents decrease on revaluation.

80

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”


Sr.

Previous revaluation (1st)

Balance left

Subsequent revaluation (2nd)

in Amt

Accounting treatment

revaluation reserve if

Amt

Accounting treatment

any

1

+5

Cr. To Revaluation surplus

5

+4


4

2

+5


5

-4

Dr. To Revaluation surplus

4

3

+5


5

-7

Dr. To Revaluation surplus

5

Dr. P & L a/c 4

-5

Dr. To P & L a/c

-

-4

5

-5

Dr. To P & L a/c

-

+4

Cr. P & L a/c

6

-5

Dr. To P & L a/c

-

+7

Cr. P & L a/c

2

Dr. P & L a/c

4 4 5


2

In above table the effect on P &L or revaluation surplus is specified, the other effect will be (either Dr. or Cr.) to fixed asset account. 13. Accounting for disposal of fixed assets Accounting treatment of Sr.

Value at which disposal item of asset carried

Gain on disposal

Loss on disposal

1

Cost model

Cr. to P & L a/c

Dr. to P & L a/c

2

Revaluation model

Cr. to P & L a/c

Dr. to P & L a/c

Note: The credit balance in revaluation surplus if any which is unreversed be transferred to revenue reserve. 14. Changes in Cost of Asset 

Changes in Existing Decommissioning, Restoration and Other Liabilities:



Changes in cost should be accounted. If the related asset is measured using the cost model: Changes in the liability should be added to (debited), or deducted from (credited), the cost of the related asset in the current period. If a decrease in the liability exceeds the carrying amount of the asset, the excess should be recognised immediately in the statement of profit and loss.

81

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”




If the related asset is measured using the revaluation model - changes in the liability alter the revaluation surplus

15. Subsequent Changes in Cost of Fixed Asset The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of 

price adjustments,



changes in duties



changes in initial estimate of cost of dismantling, removing and restoration or



similar factors.

16. Assets acquired for non-monetary consideration (Acquired in Exchange) 

Measured at fair value.



Fair value of the asset given up or asset received whichever is more clearly evident



But if either the exchange transaction lacks commercial substance or the fair value of neither the assets' received nor the asset(s) given up is reliably measurable, then the same is measured at the carrying amount of the asset(s) given up.

17. Depreciation Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from 

use,



effluxion of time or



obsolescence through technology and market changes.

18. The depreciable amount of an asset should be allocated on a systematic basis over its useful life. Assessment of depreciation is usually based on the following three factors:

82



cost or other amount substituted for the cost when the asset has been revalued;



expected useful life; and “


”




estimated residual value.

19. Depreciate separately each part of an item of property, plant & equipment: 

Each part of an item with a cost that is significant in relation to the total cost of the item should be depreciated separately.



An enterprise allocates the amount initially recognised in respect of an item to its significant parts and depreciates each such part separately. For example: airframe and engines of an aircraft.



Significant parts of an item which has same useful life and same depreciation method, may be grouped together and depreciation charged.

20. Treatment of Depreciation: The depreciation charge for each period should be recognised in the statement of profit and loss. 21. Depreciable Assets: Depreciable assets are assets, which have the following characteristics: 





are expected to be used during more than one accounting period; and have a limited useful life; and are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes and not for sale in the ordinary course of business. e.g. Plant & Machinery, Building, Furniture etc are depreciable asset.

22. Non-Depreciable Asset: 

Land is a non-depreciable asset.



Land and buildings are separable assets and are accounted for separately, even when they are acquired together.





Land has an unlimited useful life and therefore is not depreciated except items like mines. In some cases, the land itself may have a limited useful life, in which case it is depreciated in a manner that reflects the benefits to be derived from it like mines, quarries, leasehold land.

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23. Useful life 

Useful life is



the period over which an asset is expected to be available for use by an enterprise; or o

the number of production or similar units expected to be obtained from the the asset by the enterprise.



The useful life of a asset should be determined considering all the following factors:



o

expected usage of the asset

o

expected physical wear and tear;

o

technical or commercial obsolescence;

o

legal or similar limits on the use of the asset.

The useful life of an asset may be shorter than its economic life.

24. Depreciable amount 

Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.



Cost of the Asset is Rs. 5,00,000/- Estimated residual value is Rs. 25,000/- Then the Depreciable amount will be 5,00,000-25,000 i.e. Rs. 4,75,000/-

25. Review of residual value & useful life The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, accounted for as a change in an accounting estimate in accordance with AS 5. 26. Method of charging depreciation 

The depreciation method used should reflect the pattern in which the future



economic benefits of the asset are expected to be consumed by the enterprise. Method must applied consistently from period to period unless there is a change in the expected pattern of consumption of those future economic benefits or that the method is changed in accordance with the statute.

27. Where depreciation rates are provided by statute 84

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”


If the useful lives or the depreciation rates used is different from those provided in the relevant statute then specific disclosure of this fact should be made.

28. Change in the Method of Depreciation 

If there is any change in the method of depreciation, then it should be applied with prospective effect. It is treated as a change in estimate.



Now there will be no deficiency or surplus, because there is no retrospective change.

29. Retirement: 

If the assets that have been retired from the active use and are held for disposal



lower of carrying amount and net realisable value and



shown separately in the financial statement.



Any write-down in this regard should be recognised immediately in the statement of Profit & Loss Account.

30. De-recognition from Financial Statements The carrying amount of an item of property, plant and equipment should be eliminated from the financial statements when 

they are disposed off; or



no further benefit is expected from their use and disposal.

31. Points to Remember 1. Costs of property, plant & equipment to include purchase price, nonrefundable duties and taxes & all costs required to bring the fixed assets to its working condition for its intended use. 2. Any changes in cost-e.g. price change, refund of duties, Government grant etc. to be adjusted in cost of fixed assets. 3. Subsequent expenditure to be capitalized only if they meet the definition of Property, plant & equipment and recognition criteria. 4. Depreciable amount (cost/revalued amount less estimated residual value) of a depreciable asset should be allocated systematically over the assets useful life in accordance with the pattern of economic benefit derived from such asset. 85

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5. In case of change in cost of the asset, revised unamortised depreciable amount to be allocated over the remaining useful life. 6. In case of revaluation, depreciation over remaining useful life to be based on the revalued amount. 7. The useful lives & residual value of an assets must be reviewed at least at the end of every financial year. Where there is a revision of the estimated useful life or residual value of an asset, the same will be accounted as change is estimate. 8. If the rate or useful life used differs from that prescribed by the statute, then the specific disclosure should be made.

AS-13 ACCOUNTING FOR INVESTMENTS 1. Investments are – 

assets



held by an enterprise,



for earning income by way of dividends, interest and rentals,





for capital appreciation or for other benefits to the investing enterprise.

2. Assets held as stock-in-trade are not ‘investments’. 3. Definitions a) Investments should be classified into current investments and long term investments for the purpose of valuation. 

Current Investments: A current investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.



Long term Investment: A long term investment is an investment other than a current investment.

b) An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise.

86

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4. Valuation of Investments a) Current Investments: 

Should be valued at cost or fair value, whichever is lower.



either on an individual investment basis or by category of investment (i.e. equity shares, preference shares, convertible debentures, etc.) but not on an overall (or global) basis.



Any reduction in the carrying amount and any reversals of such reductions should be charged or credited to the profit and loss statement.

b) Long term Investment: 

Should be valued at Cost. However, provision for diminution shall be made to recognize a decline, other than temporary, in the value of the investments, such reduction being determine and made for each investment individually.

5. Determination of Cost The cost of an investment includes acquisition charges such as brokerage, fees and stamp duties. 6. Interest, Dividends and Rent Interest, dividends and rentals receivables in connection with an investment are generally regarded as income, being the return on the investment. 7. Cost of investments acquired for consideration than cash a) Investments acquired by way of shares or other securities 

Cost of investments acquired = fair value of the securities issue

b) Investments acquired by giving any other asset. 

Cost of investments acquired = fair value of the asset given up or investment acquired which is more clearly evident.

8. Disposal of Investments 

On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognized in the profit and loss statement.

87

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

When disposing of a part of the holding of an individual investment o

For dealer : FIFO or WAM

o

Not a dealer : WAM

9. Reclassification of Investments Sr. No. 1.

Nature of reclassification Long-term reclassified

investments as

are

current

investments 2.

Valuation of reclassification

Reclassified from current to long-term

lower of cost and carrying amount (Book Value) lower of cost and fair value

10. Right Share: Already cover in Investment Chapter 11. Amendments 

An investment property is accounted for in accordance with cost model as prescribed in Accounting Standard (AS) 10, Property, Plant and Equipment. The cost of any shares in a cooperative society or a company, the holding of which is directly related to the right to hold the investment property, is added to the carrying amount of the investment property.



Implication - Accounting of investment property was not stated but now incorporated i.e. at cost model.



An enterprise holding investment properties should account for them in accordance with cost model as prescribed in AS 10, Property, Plant and Equipment.



Implication - Accounting of investment property shall now be in accordance with AS 10.

All the Amendments highlighted in

this colour.

AS-14 ACCOUNTING FOR AMALGAMATIONS AS-14 Accounting for Amalgamation has been covered in Amalgamation chapter. 88

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”

ACCOUNTING IN COMPUTERISED ENVIRONMENT

CHAPTER - 17 ACCOUNTING IN COMPUTERISED ENVIRONMENT


Nov. 16

May 16

Nov. 15

May 15

4

4

4

4

4

1. Factors

which

will

take

into

consideration while choosing ERP Software? 1. Functional requirement of the organisation 2. Reports available in the ERP 3. Background of the vendors 4. Cost comparisons 2. Advantages & Disadvantages of using ERP Advantages 1. Standardised processes and procedures 2. Standardised reporting 3. Duplication of data entry 4. Greater information Disadvantages 1. Lesser Flexibility 2. Implementation hurdles 3. Very Expensive 4. Complexity of the software 3. Factors to be considered before selecting the pre-packaged accounting software. 1. Fulfilment of business requirements 2. Completeness of reports 3. Ease to use 4. Cost 5. Reputation of vendor 89

“Don’t stop when you are tired. Stop when you are Done”

ACCOUNTING IN COMPUTERISED ENVIRONMENT

6. Regular updates 4. Disadvantages of pre-packaged accounting software. 1. Lesser Flexibility 2. Covers only few areas and only main reports are covered 3. Lack of security 4. Bugs in the software. 5. Advantages and Disadvantages of outsourcing the accounting functions. Advantages 1. Saving of Time 2. Expertise of the third party 3. Maintenance of data 4. Economical Disadvantages 1. Lack of security and confidentiality 2. Inadequate services provided 3. High cost 4. Delay in obtaining services 6. Significance of computerised accounting system in modern time 1. Increase speed, accuracy and security 2. Reduce errors 3. Immediate information 4. Avoid duplication of work.

90

“Don’t stop when you are tired. Stop when you are Done”

FIRST REVISION PLANNER

FIRST REVISION

FIRST REVISION 1. INSURANCE POLICY [1 st Revision] Questions

Class Notes Date Tick

Practice Manual Date Tick

ICAI Study Material Date Tick

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2. SELF BALANCING [1 st Revision] Questions




1 2 3 4 5 6 7 8 91

“The difference between ordinary and extraordinary is practice.”

FIRST REVISION

9 10 11 12 13 14 15 3. AVERAGE DUE DATE [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4. ACCOUNT CURRENT [1 st Revision] Questions




1 2 3 92


FIRST REVISION

4 5 6 7 8 9 10 5. SINGLE ENTRY SYSTEM [1 st Revision] 2Module - Self Date Tick nd

Questions



1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

6. PROFIT PRIOR TO INCORPORATION [1 st Revision] Questions




1 2 3 93


FIRST REVISION

4 5 6 7 8 9 10

7. SHARES [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 8. HIRE PURCHASE ACCOUNTS [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 94


FIRST REVISION

13 14 15 9. PARTNERSHIP [1st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

95


FIRST REVISION

10. FINANCIAL STATEMENT OF NPO [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11. INVESTMENT ACCOUNTS [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 96


FIRST REVISION

12 13 14 15 16 17 18 19 20 12. COMPANY FINANCIAL STATEMENT [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 13. AMALGAMATION [1st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 97


FIRST REVISION

12 13 14 15 16 17 18 19 20 14. INTERNAL RECONTRUCTION [1st Revision] Questions




1 2 3 4 5 6 7 8 9 10 15. CASH FLOW STATEMENT [1 st Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 98


FIRST REVISION

12 13 14 15 16 17 18 19 20 16. Accounting Standards: Do all question from Your Class Notes, than Practice Manual and then ICAI Module. 17. Accounting in Computerized Environment - Revise from this Book.

99


SECOND REVISION PLANNER

SECOND REVISION

SECOND REVISION 1. INSURANCE POLICY [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2. SELF BALANCING [2 nd Revision] Questions




1 2 3 4 5 6 7 8 101


SECOND REVISION

9 10 11 12 13 14 15 3. AVERAGE DUE DATE [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4. ACCOUNT CURRENT [2 nd Revision] Questions




1 2 3 102


SECOND REVISION

4 5 6 7 8 9 10 5. SINGLE ENTRY SYSTEM [2 nd Revision] 2Module - Self Date Tick nd

Questions



1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 nd

6. PROFIT PRIOR TO INCORPORATION [2 Questions



Revision]


1 2 3 4 103


SECOND REVISION

5 6 7 8 9 10 7. SHARES [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 10

8. HIRE PURCHASE ACCOUNTS [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 104


SECOND REVISION

14 15

9. PARTNERSHIP [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

105


SECOND REVISION

10. FINANCIAL STATEMENT OF NPO [2nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11. INVESTMENT ACCOUNTS [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 106


SECOND REVISION

10 11 12 13 14 15 16 17 18 19 20 12. COMPANY FINANCIAL STATEMENT [2nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 13. AMALGAMATION [2nd Revision] Questions




1 2 3 4 5 6 7 8 9 107


SECOND REVISION

10 11 12 13 14 15 16 17 18 19 20 14. INTERNAL RECONTRUCTION [2nd Revision] Questions




1 2 3 4 5 6 7 8 9 10 15. CASH FLOW STATEMENT [2 nd Revision] Questions




1 2 3 4 5 6 7 8 9 108


SECOND REVISION

10 11 12 13 14 15 16 17 18 19 20 16. Accounting Standards: Do all question from Your Class Notes, than Practice Manual and then ICAI Module. 17. Accounting in Computerized Environment - Revise from this Book.

109


THIRD REVISION PLANNER

THIRD REVISION

THIRD REVISION 1. INSURANCE POLICY [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2. SELF BALANCING [3 rd Revision] Questions




1 2 3 4 5 6 7 8 111


THIRD REVISION

9 10 11 12 13 14 15 3. AVERAGE DUE DATE [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 4. ACCOUNT CURRENT [3 rd Revision] Questions




1 2 3 112


THIRD REVISION

4 5 6 7 8 9 10 5. SINGLE ENTRY SYSTEM [3 rd Revision] 2Module - Self Date Tick nd

Questions



1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 rd

6. PROFIT PRIOR TO INCORPORATION [3 Revision] Questions




1 2 3 4 113


THIRD REVISION

5 6 7 8 9 10

7. SHARES [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10

8. HIRE PURCHASE ACCOUNTS [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 114


THIRD REVISION

13 14 15 9. PARTNERSHIP [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

115


THIRD REVISION

10. FINANCIAL STATEMENT OF NPO [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11. INVESTMENT ACCOUNTS [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 116


THIRD REVISION

12 13 14 15 16 17 18 19 20 12. COMPANY FINANCIAL STATEMENT [3rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 13. AMALGAMATION [3rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 117


THIRD REVISION

12 13 14 15 16 17 18 19 20 14. INTERNAL RECONTRUCTION [3rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 15. CASH FLOW STATEMENT [3 rd Revision] Questions




1 2 3 4 5 6 7 8 9 10 11 118


THIRD REVISION

12 13 14 15 16 17 18 19 20 16. Accounting Standards: Do all question from Your Class Notes, than Practice Manual and then ICAI Module. 17. Accounting in Computerized Environment - Revise from this Book.

119


Accounting Revision Book latest edition 2017-2018

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